Proof of Work vs. Proof of Stake
The world of cryptocurrency is largely defined by two different types of consensus mechanisms – Proof of Work (PoW) and Proof of Stake (PoS) – both of which are different ways of confirming transactions that take place on a blockchain.
Both Proof of Work and Proof of Stake have their own advantages and disadvantages, and it is important to understand both when deciding where to mine or invest in cryptocurrency.
Here is a closer look at how Proof of Work and Proof of Stake work, the pros and cons of each, and some examples of cryptocurrencies that run on each mechanism.
What is Proof of Work (PoW)?
Proof of Work is the original consensus algorithm in blockchain technology, used to confirm transactions and to add new blocks to a chain without needing to do so through a third party – a central idea of cryptocurrency as a whole.
How does Proof of Work work?
The Proof of Work algorithm starts when a transaction is initiated and data is fitted into a block. The transaction data is then duplicated across multiple computers (or nodes) on the network. Nodes are used to verify the legitimacy of the transactions in each block.
Nodes then solve a complex computational puzzle to carry out the task of verification. The first node to decrypt each block transaction problem gets a coin as a reward. Once a block of transactions has been verified, it is then added to the public blockchain for everyone on the network to see.
Pros and cons of Proof of Work
Proof of Work models reward miners with both a block reward and a share of transaction fees, in addition to often resulting in a more decentralized network.
They do, however, require an extremely large amount of energy to execute – which has become an increasingly pressing issue in the crypto world of late. Proof of Work networks are also highly limited in the number of transactions they can process at one time. Those with the most powerful and expensive mining operations are much more likely to receive a block reward within a PoW algorithm, which has led to many discussions about the potential imbalance of such networks.
Cryptocurrencies that run on Proof of Work include:
- Bitcoin (BTC)
- Ethereum (ETH)
- Dogecoin (DOGE)
- Bitcoin Cash (BCH)
- Litecoin (LTC)
What is Proof of Stake (PoS)?
Proof of Stake is a consensus mechanism created in 2012 in response to inherent issues within the Proof of Work system – namely, the amount of energy PoW requires. Proof of Stake still uses a cryptographic algorithm like Proof of Work, but the PoS concept states that a person can only mine or validate block transactions based on how many coins they stake on that blockchain.
This means the more coins staked by a miner, the more mining power they have to mine that coin. Instead of utilizing energy to answer PoW puzzles, PoS miners can only mine a percentage of transactions relative to their ownership stake.
How does Proof of Stake work?
Most PoS blockchains have a minimum number of coins required to start staking. Once staked, the user’s chance of winning a reward is linked to the percentage of staked coins on the network. For instance, if a blockchain has 1,000,000 coins staked and you stake 10,000 coins (or 1% of the total coins staked), you now have a 1% chance of winning every reward.
Pros and cons of Proof of Stake
Proof of Stake is in many cases viewed as a fairer and more equal mining system with less reliance on electricity compared to Proof of Work.
It is also seen as much less risky in terms of a potential 51% attack, mostly because it structures compensation such that an attack would be disadvantageous for the attacker. Under Proof of Work, if a miner or mining pool were to control 51% of the network’s power, they would be able to create fraudulent blocks of transactions for themselves while invalidating those of others.
In Proof of Stake, however, the attacker would need to obtain 51% of a blockchain’s staked coins in order to carry out an attack. This would be disadvantageous as the miner would then hold a majority stake in that network, rendering an attack on the network an attack on their own holdings.
For certain kinds of 51% attacks, there is a built-in slashing mechanism within PoS that causes a large portion of the attacker’s stake (and no one else’s) to be automatically destroyed. For attacks that are harder to detect, the community can also coordinate on a minority user-activated soft fork where the attacker’s funds are destroyed.
The way PoS is set up, any attack would cost the attacker millions of dollars.
Cryptocurrencies that run on Proof of Stake include:
- Binance Coin (BNB)
- Cardano (ADA)
- Polkadot (DOT)
- Solana (SOL)
- Cosmos (ATOM)
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