Proof of Work and Proof of Stake are two concepts that define the way transactions are validated in a cryptocurrency ecosystem. We will take an in-depth look at both concepts to help you understand how they work.
For decentralized cryptocurrencies to retain their value, the network needs to ensure that no tokens can be spent twice without a trusted intermediary like PayPal or Visa verifying the transaction. As such, it needs to find a way to determine whether an account holder has validly executed the transaction. A consensus mechanism helps accomplish that.
The two main consensus mechanisms are called Proof-of-Work (PoW) and 'Proof-of-Stake (PoS). They both require miners to verify blocks before they are added to the chain, but PoW requires more computing power than PoS does. Our article on How Blockchain Technology works will give a more in-depth explanation.
How does the Proof-of-Work mechanism work?
Proof-of-Work is a pioneering mechanism that pre-existed Bitcoin but has since been intrinsically linked to the world-renowned cryptocurrency. Others refer to it as the Nakamoto Consensus, which incorporates Nakamoto's identity as the coin's creator.
Blockchains that use this mechanism rely on the longest chain rule to reach consensus. This simply means that all the blockchain members agree that the chain with the highest number of blocks is the genuine one.
It also protects the blockchain against a 51% attack, in which attackers attempt to seize control of a large portion of the network, allowing them to undo payments or double-spend coins.
In PoW, the entire operation becomes economically inefficient, allowing people to trade value without mutual trust. Furthermore, the longer the consensus block remains unchanged, the harder it will be to reverse it or change it.
The process of adding blocks to the chain is also time-consuming and costly. Miners constantly compete to be the first to verify new blocks by solving complex cryptographic puzzles. This process is what we know metaphorically as mining. Check out our article on mining pool to get first-hand knowledge of how it works.
Pros of PoW
- It helps avoid double-spending and defends the network from the 51%-attack.
- Due to its high degree of security, it effectively guards against cyberattacks.
Cons of PoW
- Demands high-capacity hardware.
- Requires a significant quantity of power, which is practically wasted when hundreds of computers are used to solve the same issue.
- The scalability difficulty occurs because the number of transactions that can be completed simultaneously is restricted.
- Provides inadequate security for relatively small networks since they remain vulnerable to the 51% attack.
How does the Proof-of-Stake model work?
The Proof-of-Stake mechanism solves the same problem of the proof-of-work but with a different approach. Instead of "mining" blocks, nodes in a proof-of-stake blockchain participate in the validation process. Participants of the network establish consensus and security by pledging a portion of their collective or private asset to the system in the form of native tokens.
An incentive system based on cryptographic Proof of Stake serves as a way to demonstrate stakeholder interest in the project's long-term viability. Nodes use smart contracts to "lock-up" their native tokens, making them unusable for a certain period while they work to keep the network running smoothly.
Each new block's authenticator is selected randomly according to a deterministic algorithm to prolong the blockchain's consensus history. In addition to randomized selection, investors' stake (stored asset) in the network is designed to discourage attempts to alter history and undermine the system.
Pros of PoS
- Reduces energy consumption and is more eco-friendly.
- It increases the network's scalability.
- The system becomes decentralized as more individuals are rewarded for running nodes.
- As proof-of-stake networks decentralize with time, they are more secure and less susceptible to hacks than proof-of-work blockchains.
- Provides participants with more equal opportunities since they are not required to invest in pricey equipment.
Cons of PoS
- Validators who own a more significant number of coins have more control over the network and receive greater rewards.
- Can result in a monopolistic situation, undermining the decentralized system.
Examples of Cryptocurrencies that use PoS against ones that use PoW
We hope this article has helped broaden your understanding of both consensus models. To learn more about the blockchain, you can read through our other posts.