Proof-of-Work vs. Proof-of-Stake
What’s the difference?
Proof-of-work (PoW) and Proof-of-Stake (PoS) are both different approaches that act as a consensus mechanism within blockchain technology.
A consensus mechanism is an algorithm that is used in blockchain technology to reach the necessary agreement on adding new data values within the blockchain.
Essentially, a consensus mechanism can include any methodology that achieves security, trust, and agreement across a decentralized network.
The two most common consensus mechanisms in blockchain technology are currently PoW and PoS.
Proof-of-Work
PoW is the original consensus mechanism that is used by the first cryptocurrency, Bitcoin.
A blockchain using this consensus mechanism requires proof-of-work to be achieved in order to add a block to the chain.
Proof-of-work is achieved by sending difficult mathematic challenges or cryptographic puzzles to the nodes on the blockchain. Although the challenges that are solved to achieve PoW are not done by people, miners are still involved in the process as they provide the required computational power.
Miners are the people that are part of the consensus who have the required computational powers and opt in for their devices to solve the challenges in order to achieve proof-of-work.
The miner whose computational power solves the problem first gets rewarded with tokens. In the case of a Bitcoin miner, the tokens rewarded are Bitcoin. This is how miners are incentivized to participate. The term ‘miner’ is fitting for participants as they are essentially mining new coins.
The miner with the strongest computational power is also most likely to win with the underlying argument that the one who puts the most resources in are less likely to want to compromise the blockchain.
It is this notion that created mining pools, where individuals teamed up and pooled their computational power and resources to be more likely to solve the challenge and split the reward evenly amongst participants. Although this could remove barriers to entry for many people, it does create an issue of centralization, making the blockchain more vulnerable to unwanted attacks.
Proof-of-work is a very effective solution in adding new blocks to the blockchain. However, PoW is a consensus mechanism that requires heavy computational power, making its contribution to energy expenditure, waste and global warming one of its biggest problems.
Proof-of-Stake
Unlike proof-of-work, proof-of-stake does not rely on heavy computational power. Instead, the PoS algorithm randomly selects its validators by how much they have staked in the network.
Proof-of-stake does not have miners; instead, the algorithm has validators who can also be known as stakers or block producers. Also, PoS does not let validators mine new blocks, but instead mint or forge new blocks.
For a participant to become a validator, they must ‘lock up’ or stake their coins on the network, this acts as a security deposit. The more coins that a validator stakes, the more likely they are to be chosen to forge the next block. This makes the validator with the most coins staked, the most likely to earn the rewards for minting.
Once the validator has been randomly selected, the validator must confirm that all transactions on the block are valid in order for the block to be added on the blockchain. The validator then gets the reward (which are the transaction fees inside the block).
The validator can unstake at any time, but they won’t receive their coins and rewards immediately. This is used to hold the validator accountable and for the algorithm to safeguard itself from fraudulent activity — this also ensures that the validator had approved of only legitimate transactions on the blockchain. Otherwise, the coins and rewards staked will be revoked and not returned to the validator.
It’s clear that both proof-of-work and proof-of-stake algorithms have their benefits and drawbacks.
Proof-of-stake is a more energy-efficient consensus mechanism as it doesn’t require the computation power of all the nodes on the blockchain. In addition, PoS is also more decentralized compared to PoW given that proof-of-work mining pools centralize the mining process. However, proof-of-stake is still prone to fraudulent activity and attacks, as the validators with the highest staked are favored.
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