PROOF OF WORK VS PROOF OF STAKE
“Proof of work” and “Proof of stake” are the two major consensus protocols cryptocurrencies use to verify new transactions, add them to the blockchain, and create new tokens.
What is a Consensus Protocol?
A consensus protocol in the context of blockchain refers to the mechanism by which the distributed nodes in a blockchain network agree on the validity and ordering of transactions.
Consensus protocols are the rules by which a network operates, in the case of a blockchain network, the consensus protocol provides the rules by which a transaction on the network is verified as legitimate or fraudulent. It is a system that allows all the computers in a crypto network to agree about which transactions are legitimate and which ones aren’t. Since blockchains are decentralized and maintained by multiple nodes (computers) spread across the network, achieving consensus is crucial to ensure the integrity and security of the system.
WHAT IS PROOF OF WORK (PoW)?
Proof of work is a technique used by cryptocurrencies to verify the accuracy of new transactions that are added to a blockchain. The primary objective of PoW is to achieve consensus and secure the network by ensuring that new blocks are added to the blockchain in a decentralized and trustless manner.
Proof of Work allows all nodes on these networks to agree on the current state of the blockchain and helps secure the blockchain against a variety of attacks.
The work in proof of work
The reason it’s called “Proof of work” is because the network requires a huge amount of processing power. The «work» refers to the computational effort that miners (participants in the network) need to expend to solve a complex mathematical puzzle. This work provides security to the blockchain network and ensures that new blocks are added to the blockchain in a controlled and secure manner.
The work involves repeatedly hashing (applying a cryptographic function) the data of a block along with a changing value called a «nonce.» Miners need to find a nonce that, when hashed along with the block’s data, produces a hash that meets specific criteria, often having a certain number of leading zeros.
Proof of Work and Mining
Proof of work mechanism requires miners to use computing resources for the privilege. Miners and proof of work guarantee transparent and accurate transactions. For blockchains that use proof of work, miners are the guardians and facilitators that make the system run smoothly and accurately.
Here’s how proof of work works:
Mining:
Crypto miners compete to be the first to solve a complex math problem. By showing proof that they’ve undertaken the computational work referred to as a hash, earns the miner the right to process the block of transactions. Users buy and sell cryptocurrency, and the data from these transactions are recorded into the block.
Block reward:
The miner who successfully finds the solution and creates a new block earns a block reward of newly minted cryptocurrency tokens and any transaction fees associated with the transaction included in the block.
Chain Extension:
Once a block is added to the blockchain, the next block’s puzzle is based on the hash of the previous, creating a chain of blocks linked together in a chronological order.
Difficulty:
The difficulty of the puzzle is adjusted regularly to maintain a target block creation time, usually around 10minutes in the case of Bitcoin. If miners collectively find blocks too quickly, the difficulty increases, and if they take too long, the difficulty decreases.
ADVANTAGES OF PROOF OF WORK
Security – PoW is highly secure against attacks because it requires a vast amount of computational power to rewrite blockchain history.
Decentralization – PoW allows anyone with sufficient computational power to participate in block creation, promoting a more decentralized network.
DISADVANTAGES OF PROOF OF WORK
Energy Consumption – PoW is criticized for its high energy consumption as miners compete to solve computationally intensive puzzles.
Centralization – One of the most attractive features to cryptocurrency investors is decentralization, thanks to the intense computational and energy demand of proof of work, however, mining operations have become centralized in a small number of major outfits. This could potentially lead to a few entities controlling the majority of cryptocurrency operations.
WHAT IS PROOF OF STAKE (POS)?
Proof of Stake (PoS) is a consensus protocol used in blockchain networks as an alternative to Proof of Work (PoW). In a proof of stake system, staking serves a similar function to proof of work’s mining, in that it’s the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange.
How does Proof of Stake work?
In a Proof of Stake (PoS) blockchain network, validators are participants responsible for proposing and validating new blocks of transactions. These validators are selected based on the amount of cryptocurrency tokens they have staked as collateral in the network. The term «staking’refers to the process of locking up a certain amount of tokens as a commitment to the network’s security and proper functioning. Validators play a crucial role in the PoS consensus algorithm by ensuring the integrity and security of the blockchain.
Staking: Participants (validators) in the network are required to lock up a certain amount of the blockchain’s native cryptocurrency as collateral. This demonstrates their commitment to the network’s security and proper functioning.
Consensus: Validators take turns proposing and validating blocks. When a validator is chosen to create a block, they include transactions, sign the block with their private key, and broadcast it to the network.
Verification: Other validators in the network then verify the block and its transactions. This verification process ensures that the block adheres to the rules of the blockchain and contains valid transactions.
ADVANTAGES OF PROOF OF STAKE
Energy Efficiency: PoS is more energy efficient compared to PoW because it doesn’t require miners to solve complex mathematical puzzles. It selects validators instead based on their stakes, reducing the need for high computational power.
Decentralization: PoS can still achieve decentralization by allowing a larger number of participants to validate transactions, even without relying on intense computational power.
Scalability Potential: PoS is often considered more scalable than PoW, as it doesn’t face the same computational limitations when processing transactions.
DISADVANTAGE OF PROOF OF STAKE
Experience: Proof of Stake is simply much younger, and less battle tested than Proof of Work, which has stood the test of time for over a decade since Bitcoin was created. In fact, one could argue that Bitcoin and its protocol implementation is the world’s biggest bug bounty.
Complexity: Proof of Stake protocols are much more complex to implement in code, which also means there is a higher risk of introducing bugs and allowing issues to arise.
Proof of stake vs Proof of work
Both consensus mechanisms help blockchains synchronize data, validate information, and process transactions. Each method has proven successful at maintaining a blockchain, although each has pros and cons. However, the two algorithms have very different approaches.
Proof of Stake
- Block creators are called validators
- Participants must own coins or tokens to become a validator
- Energy efficient
- Security through community control
- Validators receive transactions fees as rewards
Proof of Work
- Block creators are called miners
- Participants must buy equipment and energy to become a miner
- Not energy efficient
- Robust security due to expensive upfront requirement
- Miners receive block rewards
Why is proof of stake seen as an upgrade from proof of work?
Proof of stake is faster, reduces energy consumption and environmental impact and requires no special computing equipment. For these reasons and others, it’s the validation protocol for newer waves of cryptocurrencies. Bitcoin’s top competitor Ethereum, used proof of work on its blockchain until September 2022, when the highly anticipated transition to proof of stake was made. Each blockchain project that uses proof of stake protocols has their own unique algorithm with different rules and methods that dictate their particular network functionality.
