Know the difference: Proof of work vs. proof of stake
Blockchain networks function on a decentralized architecture. Since there is no central authority to ensure approvals of verified transactions, blockchain networks use consensus mechanisms to validate transactions. This article explains two major consensus mechanisms: “proof-of-work,” and “proof-of-stake.”
Consensus mechanisms
Consensus mechanisms, also called consensus protocols or consensus algorithms, allow distributed systems to work together by meeting the agreement’s rules. They play a key role in the function of blockchain networks and cryptocurrencies.
At the heart of all cryptocurrencies that are built on blockchain networks is their consensus mechanism. Blockchain networks need a way to agree with the contents of their distributed ledger. The network needs to agree on which transactions to add and in which order they need to be added.
It is easy to come to an agreement in a centralized system. However, distributed decentralized systems do not work that way. They need to allow information to flow accurately in the presence of adversaries using consensus. Satoshi Nakamoto solved the consensus problem using a proof-of-work method when he invented Bitcoin.
What is Proof-of-work (PoW)?
The leading cryptocurrencies in today’s world, Bitcoin and Ethereum 1.0, work based on a proof-of-work consensus mechanism. Proof-of-work and mining are very closely related concepts. Mining is the work itself in the PoW algorithm. Bitcoin, Ethereum 1.0, Litecoin, Bitcoin Cash, Monero work on proof-of-work mechanism.
The first block in a PoW blockchain is encrypted into its software. It is called the “genesis block” or “block 0”. All the blocks that are mined will refer to the previous blocks and are added to the blockchain in chronological order. PoW blockchains are secured and validated by nodes or miners across the world by solving complex mathematical puzzles.
The miner who solves the puzzle first will receive the reward in terms of a predefined amount of cryptocurrencies and also gets the chance to update the blockchain with the latest verified transactions. PoW is a robust consensus mechanism to secure a decentralized blockchain network. The more miners that join the network mean both the security and power consumption of the network will increase.
It is highly difficult and almost impossible to hack a PoW blockchain because it involves processing power. On the other hand, proof-of-work also has some disadvantages because it is an energy-intensive process. Blockchain networks like Ethereum which involve smart contracts face scaling problems because the PoW mechanism cannot accommodate a vast number of transactions.
What is Proof-of-stake (PoS)?
In the proof-of-stake consensus mechanism, ‘staking’ works similar to the ‘mining’ in a proof-of-work mechanism. The accurate details of the working mechanism may vary based on the project. In general, PoS blockchains involve a network of ‘validators’ who will contribute or ‘stake’ some of their cryptocurrencies in exchange for the opportunity to validate the transactions. Ethereum 2.0, Tezos, Cardano, and other newer cryptocurrencies work on the PoS mechanism.
The blockchain network selects a winner based on how much crypto they staked and for how long they have staked. The participants who stake the most will have high chances of getting selected. When the winner validates the transactions, other participants will confirm that the block is accurate. All participants will get a reward in the native cryptocurrency, and it is distributed in proportion to the amount of crypto they staked.
Though this process sounds easier when compared to the PoW mechanism, being a validator is a huge responsibility and requires a lot of technical knowledge. The amount of crypto that needs to be staked will be very high, and there is a possibility to lose some of the cryptos if the node goes offline or if they validate a bad block of transactions. However, crypto holders can participate in staking by joining a staking pool that is run by someone else. This way, they can earn rewards without being worried about losing their staked crypto.
Differences between PoW and PoS
One of the major differences between PoW and PoS mechanisms is energy consumption. PoS blockchain does not require participants to spend electricity to solve complex puzzles. The energy and resources required for the PoS blockchain to operate are significantly lower. In PoW, miners receive block rewards. In the case of PoS, validators receive transaction fees.
Another major difference is the economic consequences of malicious actions. In the proof-of-work mechanism, if a miner submits invalid information or blocks, the penalty will be the cost of computational power, energy, and time. Whereas, in proof-of-stake, if a validator accepts a bad block, a portion of their staked funds will be cut down or slashed as a penalty.
About MouseBelt
MouseBelt is an ecosystem promoting blockchain innovation by supporting hands-on development for emerging projects and leaders in the industry. The leaders they support are:
- Investment — MouseBelt accelerator supports early companies with capital and in-kind investments;
- Development — MouseBelt Engineering works closely with projects, enterprises and startups by providing development support with a focus on infrastructure, protocols, Dapps, smart contract development and beyond.
- Education — Our COINS Podcast, Media, University Education Program, Blockchain Education Alliance, and Start Up School encourage newcomers to get involved with blockchain. We work with various university and industry partners bridging the gap between industry and academia.
