If you’ve delved into the complex world of mining cryptocurrency, you may have come across the terms Proof of Work (PoW) and Proof of Stake (PoS).
Each are consensus mechanisms used to confirm transactions that take place on a blockchain and negate the need for a third party. While they have many overlapping qualities, there are key differences between the two that relate to the how and the who of creating new blocks on a blockchain system.
Still, confused? Stick around. We’ll break down Proof of Work vs Proof of Stake.
What’s a consensus mechanism?
Before we delve into the specifics of these two protocols you may be wondering, just what is a consensus mechanism?
For cryptocurrency to remain secure, and transactions to remain authentic, a network of computers exist to verify and regulate all new units of its supply.
This is a consensus mechanism. A mechanism that is used in blockchain technology and that is fault-tolerant with the purpose of reaching an agreement around the validity of new blocks on the network among distributed nodes.
Proof of Stake and Proof of Work are two of the most widely used consensus mechanisms.
PoW vs PoS: Why do you need to know the difference?
If you’re mining cryptocurrency, the answer to this might be a bit more self-explanatory. If, however, you’re a cryptocurrency investor this is useful to know for another reason.
Understanding which consensus mechanism a cryptocurrency uses may help you better evaluate which digital currencies to add to your portfolio. Proof of Stake cryptocurrencies especially can come with added benefits, but also added responsibilities.
More on that later.
For now, let’s take an in-depth look at the two.
Proof of Work
The Proof of Work protocol, or PoW, protocol was in fact not originally conceived for cryptocurrency. The concept was originally introduced in the 1990s as a means to help reduce and prevent email spam.
It was Satoshi Nakamoto, the founder of the Bitcoin blockchain, who applied the concept to cryptocurrency while he was searching for a way to verify transactions without needing any third-party input.
The PoW Blockchain
Cryptocurrency mining is not only crucial in the development of new coins for circulation, but in the maintenance of the Blockchain ledger. To mine cryptocurrency, especially in the case of the PoW protocol, requires huge computational power.
Each blockchain contains an initial block, hardcoded into the software. All subsequent blocks in that chain then refer to and contain the complete ledger of previous blocks.
A Proof of Work system is used to determine the validity of new blocks and helps reach a consensus on the blockchain.
PoW miners compete to solve extremely complex mathematical puzzles/problems through a combination of cryptography and computational power in order to create a new block. The numerical solution they must reach is referred to in the PoW protocol as a ‘hash.’
For a block to be valid, it must meet the rules of the network and is subsequently validated by Nodes.
The miner that successfully proposes this valid block then gets the block reward.
The benefits of PoW
One benefit of a PoW network is it can be an excellent way to deter spammers. A large amount of effort is required for each process, and typically most spammers won’t have the computational power for this. Even if they did have that power, the financial demands of running such an energy-draining process would likely not exceed any profits they could make from scamming activity.
Additionally, PoW systems tend to be more secure. With such a vast array of computers and dedicated mining machines in a single network working to solve a solution, anyone wanting to overpower or manipulate that network would require substantial computational power to do it.
The detriments of PoW
The Proof of Work is not without faults.
In fact, it is the perceived fault of Proof of Work systems that say the rise of Proof of Stake.
The extreme amounts of computational and processing power in PoW protocols mean more energy consumption and massive electrical costs.
The founders of Proof of Stake have argued the model requires an equivalent of $150,000 every single day in electricity costs.
Sustainability is the primary argument against the Proof of Work model, both from a financial and environmental standpoint.
Another major argument against PoW is the risk of a 51% Attack. This refers to a blockchain attacked by a group of miners that control more than half of the network’s computing power.
Proof of Stake
Proof of Stake has many similar mechanics to Proof of Work.
Like PoW it also contains a first block hardcoded into the software. In this instance, it is referred to as the genesis block.
PoS protocols, however, were introduced to solve the perceived energy consumption issues of the PoW system.
The PoS Blockchain
The major difference between the PoW and PoS blockchain networks is how new blocks are created. Instead of multiple computers racing to solve a problem in order to create a block, the PoS system elects a user to create this block.
In order to be selected, users must stake a certain amount of their cryptocurrency in a special contract. There is a range of factors in this protocol that pseudo-randomly select the user to create and propose a new block, and once created the new block is then verified within the network.
PoS energy consumption
The key advantage of PoS is its energy efficiency.
Much less computational power is required, thus much lower annual energy consumption.
In addition, this can encourage greater participation as it is easier and more affordable than PoW.
The Detriments of PoS
One of the disadvantages of PoS is that there can be bias towards validators with more coins. The larger the number of coins you have to stake, the more influence you can have in the network.
This can be a deterrent to new miners, but PoS is still typically viewed to have minimal downsides.
Which coins use which consensus mechanism?
The most well-known blockchain that uses the PoW mechanism is the Bitcoin network, however, it is still more widely used.
The first blockchain to use PoS was Peercoin, but it has since been adopted by other blockchains such as BNB (the native coin of exchange Binance), and cryptocurrencies including Blackcoin, Nxt, and Cardano.
PoW vs PoS: Which is Superior?
There’s no one answer to this, but now that you know the benefits and detriments of each we hope you feel more empowered to make a call on the value of each.
Either way, the cryptocurrency mining process in the coming years will be an interesting space to watch.
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