Proof-of-stake and Proof-of-work are two terms that are commonly used in the cryptocurrency world. These are two distinct ideas that are critical to crypto transactions and security. They are at the heart of blockchain technology and how it functions.
Consensus mechanisms include Proof-of-Stake (PoS) and Proof-of-Work (PoW). Although they operate in different ways, both ensure that users are truthful and maintain transparency. They are programmed to incentivize good users while making it extremely painful and expensive for bad ones. They aid in the detection of frauds such as double-spending.
A general understanding of’mining’ aids in understanding the distinction between the two consensus mechanisms. Crypto transactions are verified through’mining’ in the case of a Proof-of-Work (PoW) mechanism. In Proof-of-Stake (PoS), ‘validators’ are chosen based on specific rules and the amount of’stake’ they own in the blockchain.
Cryptocurrencies are designed to be distributed and decentralized. A blockchain transaction can be seen and verified by a global network of computers. Before the transactions can be verified, the computers on the network must agree on what happened. The immutable nature of Blockchain prevents any computer(s) from engaging in any fraudulent activity because it will be detected instantly.
Proof-of-work (PoW)
The proof-of-work (PoW) consensus mechanism involves miners competing to solve cryptographic puzzles and validate transactions on the blockchain. As a result, they receive block rewards from the blockchain in the form of its native cryptocurrency. For example, Bitcoin is a PoW blockchain in which miners earn $BTC in exchange for their services. It is the older of the two and powers blockchains such as Bitcoin ($BTC), Ethereum ($ETH), and others. Ethereum is already in the process of transitioning from a PoW to a PoS consensus mechanism, which will be completed by August 2022.
The PoW mechanism has numerous advantages that simple yet valuable blockchains such as Bitcoin could take advantage of. More miners are encouraged to join the network as the value of a cryptocurrency rises. These miners improve the blockchain’s security and power. However, due to the massive processing power required in PoS mechanisms, it is impractical for an individual or a group to use it in a large blockchain network.
Furthermore, it is an energy-intensive process that is detrimental to scaling in order to accommodate the large number of transactions occurring on the blockchain.
Proof-of-Stake (PoS)
In the case of Proof-of-Stake (PoS), random validators are chosen to ensure that blockchain transactions are reliable and secure. To become a validator, these validators encrypt a specific portion of their crypto. Their investment in the blockchain obligates them to be vigilant network watchdogs. PoS consensus mechanisms are used by newer blockchains such as Cardano ($ADA) and Tezos ($XTZ).
Ethereum developers recognized early on that PoW would present scalability issues as the number of transactions increased. Unlike Bitcoin, Ethereum can handle a variety of Decentralized Finance (DeFi) transactions, NFT minting, crypto transactions, and so on. Transaction costs or gas fees on Ethereum have increased significantly as traffic has increased.
Their only option was to switch from a PoW mechanism to a PoS mechanism. The transition is expected to be completed in August 2022. Tezos, Atmos, and Cardano are all cryptocurrencies that use PoS consensus mechanisms. Their shared goal is to maximize speed and efficiency while lowering costs.
Major Differences
One of the primary distinctions between the PoW and PoS consensus mechanisms is energy consumption. PoS blockchains do not necessitate the purchase of expensive electronic hardware that generates a lot of heat and leaves a huge carbon footprint.
If the miners or validators do not do their jobs correctly, both consensus mechanisms have economic consequences in the form of penalties. If a miner submits incorrect information in PoW, the penalty is the sunk cost of energy, time, and computing power.
In the case of PoS, a validator’s staked crypto funds serve as an incentive to act in the best interests of the network. If a validator submits a bad block, network operators have the option of’slashing’ a portion of their crypto as a penalty. In the event of an error, the network can predetermine the specific amount that can be slashed.
