This system is known as the consensus mechanism. Cryptocurrencies use two of the major consensus mechanisms namely ‘Proof of Work’ and ‘Proof of Stake,’ commonly referred to as PoW and PoS, respectively.
Ideally, Proof of Work was first used by Bitcoin. It uses mining to attain its goals. Proof of Stake, on the other hand, is used by the ETH 2 blockchain, Cardano, and others typically use staking to serve the desired purpose.
Both these consensus mechanisms are now required to confirm transactions made on a blockchain without requiring any interference from a third party.
These are algorithms that are used not only to verify new transactions and add them to the blockchain but also while creating new crypto tokens.
Though the purpose of the two is the same, there are lots of differences between these two consensus mechanisms which you should know.
If you do not, fortunately, you are in the right place. This article will tell you all about that.
Therefore, read this article right from the start to finish so that you gain more knowledge about PoS and PoW and explain them to your friends confidently, if need be.
Crypto Proof of Work vs Proof of Stake – The Differences
In this article you will find the basic differences between these two consensus mechanisms, their diverse working process, popularity, uses, and lots more.
Knowing them and also which is better among the two will enhance your chances to make extra money from the crypto space by becoming a miner.
This knowledge will also help you to evaluate the available crypto coins in your portfolio in a much better way because those coins that come with a PoS consensus mechanism will bring in added benefits and responsibilities as well.
Here they are.
The Proof of Work consensus mechanism is based on cryptography which is an advanced form of mathematics.
The mathematical equations used in cryptography are very difficult and it is only a powerful computer that can solve them.
All these equations are unique. This means that once one is solved, the network will know that the transaction is legitimate.
On the other hand, the alternative Proof of Stake model created by two developers called Scott Nadal and Sunny King in 2012 uses a more equal but much fairer mining system.
This makes it more scalable and can validate transactions with very little reliance on electricity.
One of the most significant differences between Proof of Work and Proof of Stake consensus mechanisms is the amount of energy consumed.
Since the PoW consensus mechanism needs miners to spend their resources to solve the puzzle or on duplicative processes, it consumes a lot more energy.
On the other hand, the Proof of Stake consensus mechanism allows the networks to run smoothly while consuming considerably lower resources and energy.
Therefore, this model is considered to be more efficient and less harmful to the environment.
The miners or validators can use any energy source including wind, hydroelectric power, and other forms of energy that are less wasteful.
Both these consensus mechanisms penalize the users for network disruptions with economic consequences.
However, in the Proof of Work consensus mechanism, the penalty may come as a sunk cost of energy, time, and computing power.
On the other hand, in Proof of Stake, the stake of the validators is slashed as a penalty for accepting a bad block. The amount of slashing typically depends on the policy of the network.
The original adopter of the Proof of Work consensus mechanism was the Bitcoin blockchain.
On the other hand, the Proof of Stake consensus algorithm is used by several well-known cryptocurrencies such as Dash, NEO, and more.
Transaction Verification Process
For the Proof of Work consensus mechanism, the process followed for verifying a transaction is pretty simple which, however, causes the scalability issue.
There is no third party involved in this process. Miners need to use their computational power to solve the cryptographic algorithm or a mathematical equation.
Once it is solved by any one miner, the transaction is verified and added to the public blockchain and everyone can see it.
On the other hand, the Proof of Stake consensus algorithm takes a different approach to verify a transaction in order to confirm it.
Though it uses the same cryptographic algorithm, the objective of this consensus mechanism is different. The rewards in this process depend on the amount that is staked by the validator.
Since there is no block reward, they are not called miners but ‘forgers’ or ‘validators’ instead. They simply earn a transaction fee and not with a new block every time they verify a block.
In the Proof of Work system, all the miners are required to participate in it and it is only the one who solves the complex cryptographic algorithm first is rewarded.
For this, the winner typically needs to have a more powerful hardware and spend a lot on electricity bills which makes this process quite an expensive one to participate in.
Therefore, in the PoW protocol, cryptography is combined with computational power to ensure the validity of transactions and create a consensus to record a transaction into the blockchain.
In this process, the miners try out a set of pseudorandom numbers, called a hash, which is combined with the data given in the block.
It then goes through the hash function computer to produce an outcome that will match the given conditions that are laid down by the protocol.
In comparison, the Proof of Stake model is not only a cheaper alternative to take part in but it is also quite convenient for the participants.
This is because the system itself chooses the winner at random based on the number of crypto coins they have staked on the particular blockchain network.
The users need to stake or lock a specific number of their coins to the blockchain based on a special contract.
This amount determines whether or not they will be chosen as the producer of the next block. In order to ensure that the wealthy always do not get this chance, the network also considers some other factors to allow others to take part in a PoS blockchain.
These include pure randomization, the amount of time the coins are staked by a node, and more.
In the PoW model, the blockchain is aligned in a chronological order depending on the order of the new transactions made.
Here, the first block is hardcoded into the blockchain software and is called the genesis block or a Block 0.
Typically, this block does not refer to a previous block, needless to say. All transactions made henceforth are added to the blockchain one after the other with reference to the previous block. Each of these new blocks contains a copy of an updated and complete ledger.
On the other hand, the blockchain ordering in the Proof of Stake model is quite similar to that of the PoW model with the string containing the genesis block hardcoded into it at first and the subsequent ones added to it refer to the previous blocks and contain a copy of the ledger.
However, the difference is that there is no competition among the miners to get selected and rewarded in PoS cryptocurrencies. Therefore, these blocks are said to be ‘minted’, or ‘forged’ and not ‘minted.’
In terms of rewards, the miners participating in a PoW crypto are rewarded with a new block of the same coin for every block that is considered to be valid and is accepted and added to the network.
However, this block reward may be reduced in the case of a few specific crypto coins once a certain number of blocks are minted and added. This is done to ensure that the supply of total money and coin is finite and is deflationary.
On the other hand, the reward distribution in the PoS currency is much the same as that is followed in the PoW model but the rewards are given on the basis of the ownership of coins.
In order to get more regular payouts, you may also avail other different staking services that may be offered by the exchange.
The PoW consensus mechanism keeps the network safe because in order to make it unsafe a malicious miner will need to take over 51% of the computing power of the network, which is pretty hard.
Moreover, when and if this thing happens, the existing miners may choose to leave the blockchain network and move to a newer and safer one that has forked.
This may, however, make things more difficult. The miners will then have to split the available computational resources between the new and old networks and incur a loss on their economic incentives.
Therefore, PoW is said to prevent natural and constant forking and motivates them to stay with the one that is less powerful.
It allows miners to maximize the returns on their investments as well as helps in avoiding internal corruption in the network by oligopolies and facilitates making logical decisions.
On the other hand, the PoS consensus mechanisms solve the issues of energy wastage and scalability much more efficiently.
As a result, it also makes the process of approval of transactions much faster by changing the parameters of the system and setting up a consensus before the construction of the blocks.
This facilitates in processing thousands of transactions requests per second and also reduces the latency spike to less than a millisecond.
In the PoW model, the miners need to use a lot of energy and pay high bills for electricity needed to solve a complex mathematical puzzle and verify a block on the blockchain.
Apart from the high expenses, this process is also harmful to the environment as it produces a lot of heat. You will also need to adhere to a credible and specific monetary policy which is critical to ensure the security of the network.
Also, if you are not a major coin holder for any compatible hashing algorithm or are susceptible to a 51% attack, the larger coin holders may turn you out of the network by turning their hardware against you.
In that case, you will no longer be able to earn an incentive. The transaction fees can also become higher when the network is overloaded.
On the other hand, the set of difficulties in the PoS consensus mechanism includes the dominance of the major token holders. This means that the early adopters tend to possess more power and also have the most money.
And, being a relatively new paradigm in comparison to the Proof of Work model, this model does not have a long track record.
Moreover, PoS systems do not discourage forking of the blockchain automatically and in case the blockchain splits the validator is rewarded by the duplicate copy of the stake.
In such a situation, when the validator signs off from both sides of the fork, the ‘nothing at stake’ dilemma sets in.
This allows the validator to potentially spend their coins twice and receive fees in return for it in double as well.
Which is More Useful – Crypto Proof of Work or Proof of Stake?
Ideally, as of now, Proof of Stake seems to be a much better alternative to the Proof of Work consensus mechanism.
There are lots of reasons for it and the differences between them are one primary reason.
However, to understand both consensus mechanisms in a better way and to know which one is more useful today, you will need to look into them both more closely and know a few other facts as well.
Since there is no central authority in the middle, the primary objective of the decentralized crypto networks is to ensure that no user spends the same money twice.
This is done through the consensus mechanism which also helps the nodes or computer network to agree on a transaction and determine whether or not it is legitimate.
PoW or Proof of Work consensus mechanism is supposed to be the original and used by Bitcoin.
It is called Proof of Work because it needs a huge large amount of computing power for processing.
The idea of PoW is quite similar to mining since the blockchain is verified and secured mainly by the virtual miners from all over the world.
All these miners compete with each other to solve a math puzzle first and get to update the blockchain and receive a predetermined number of crypto as a reward from the network.
Proof of Work is a proven and a stout way to maintain the security of a decentralized blockchain.
This is ensured by the growing number of miners joining the network to earn incentives as the value of a crypto coin grows, thereby enhancing the security and power of the network.
This process is, however, energy intensive and that is what makes it quite impractical for someone to mess with the blockchain of the cryptocurrency.
On the flip side, the same fact causes some trouble in scaling and cannot accommodate a large number of transactions.
Therefore, blockchain developers have been looking for an alternative that comes in the form of Proof of Stake protocol.
This consensus mechanism helps to overcome the limitations in scalability provided by PoW and has since grown in popularity.
It also prevents the fees for making a transaction from rising. It has helped the developers to come up with a completely new ETH 2 blockchain.
This was rolled out in December 2020 and is expected to be completed by 2022.
The good things about the PoS mechanisms are that it reduces fees and resources and enhances the speed and efficiency of the network.
In this system, the staking serves the same purpose as mining in PoW since it is the method by which the participants in the network get selected to verify and add the newest batch of a transaction to the blockchain and earn some additional crypto in return.
Ideally, in this process, there is a network of validators employed by the blockchain who stake or contribute their own crypto.
The network selects the validators on the basis of the amount and time of crypto the validator has in the pool and rewards the most invested users in the native crypto coin.
When the other validators agree that the block is accurate and attest to it, they are rewarded.
The network adds the confirmed block to the blockchain when a threshold number of attestations is reached on it.
Rewards are distributed to all the validators as per the proportion of their stake.
However, there are some major points to remember at this point if you want to take on the responsibility of a validator of a blockchain. These are:
- One, you will need to have a moderately high level of technical knowhow.
- Two, you will need to meet the minimum requirements of the network to stake your coins which can be pretty high.
- Three, you may lose some of your stake in the process of slashing if your node goes offline.
- And four, you may also lose your stake if you attest to a bad transaction.
If that is asking a bit too much from you, you can alternatively join a staking pool run by another person and earn rewards on your crypto that may sit idle otherwise.
This process is called delegating. It is quite an easy process for staking and the tools that the exchange offers may also make it pretty seamless.
The most important feature of the Proof of Stake consensus mechanism which makes it more efficient than the Proof of Work model is that the users who stake their coins are responsible themselves to do things correctly while validating a new transaction.
This is because if they attempt to make any malicious transactions or try to hack the system then that particular forger will lose the entire stake.
This makes the entire network more secure.
This also means that the more you stake on a network, the more you will earn because rewards are given on the basis of your staking amount, and, conversely, the more you lose if you work against the system.
Considering everything that has been said so far, it can be said that the PoS model is efficient enough to resolve the issues that you will find significant in a PoW consensus mechanism.
It does not need to consume massive energy to operate and saves energy and also helps the users to save on the establishment costs and maximize their rewards by creating mining pools.
This means that these pools are not in the hands of a handful of majors now, thereby, preventing a 51% attack, which is a high possibility in the PoW consensus mechanism.
The PoS model is much better in comparison to the PoW model because it does not allow centralization of the mining pools and instead rewards the miners with an amount that is proportionate to their stake.
Therefore, in spite of the vulnerabilities and theoretical drawbacks, the benefits offered by the PoS consensus mechanism are much more than the PoW model and therefore it can be concluded that the PoS protocol will be the next step to upcoming developments in the blockchain world.
Since you have reached here, by now you must have well understood how each of the Proof of Work and Proof of Stake consensus mechanisms works and how they differ from each other. It will now be easy for you to choose a coin to invest in.