Proof-of-stake (PoS) and proof-of-work (PoW) are both consensus mechanisms used in cryptocurrency for processing transactions and creating new blocks in the blockchain. Consensus mechanisms describe the process of validating entries in a distributed database securely; for cryptocurrency this database is known as the blockchain.
We will be learning more about PoW and PoS, as well as highlighting some key differences between them.
Proof-of-work (PoW)
PoW is a decentralized consensus mechanism where randomly assigned participants within a network expend computing power to work out mathematical puzzles; the puzzles are the work used to prove new entries are genuine when added to the blockchain, a publicly distributed ledger. This is most recognizable in the Bitcoin network, where miners use computing power to mine new coins (tokens) and generate new blocks. Cryptocurrencies that use PoW can be exchanged securely over peer-to-peer networks, without 3rd party oversight as it would be near impossible for an individual to alter the blockchain. Users can detect tampering through hashes, long strings of numbers that act as the signature of an authentic PoW instance. Each hash created exists in a chain, with previous and subsequent hashes linked to its unique numerical sequence: any artificial change to a hash would require not only modifying every other hash in the chain but also distributing this change across the entire peer-to-peer blockchain network. With current computing technology this is all but impossible, providing PoW its security but also making it more energy intensive as the network scales larger.
Proof-of-stake (PoS)
PoS is a consensus mechanism where “validators” (users) authenticate block transactions based on how many coins (tokens) they can offer as collateral, or stake. PoS reduces the amount of computational work needed to verify blocks and transactions, which lowers the energy usage of the network. Recently the Ethereum network updated its consensus mechanism from PoW to PoS, an event known as The Merge.
PoS randomly assigns users, called validators, to validate transactions and blocks across the network. Though randomly selected, validators with more tokens (coins) staked have a higher chance of being selected. The reward for the validator is a nominal transaction fee, but it does require capital in the form of tokens available for staking; for example, Ethereum users must stake at least 32 ETH for a chance to become validators. When enough validators have been randomly selected to validate a block, it is finalized and closed. PoS is regarded as less vulnerable to potential attacks on the network, as any gain from such attacks are not nearly worth the effort. Actual PoS mechanisms may vary depending on the cryptocurrency, but all share a requirement that users that authorize transactions and blocks across the network stake a certain amount of tokens (coins) to be selected as a validator.
Key differences
Based on the breakdown of how these two consensus mechanisms work, here are some key differences between PoW and PoS.
| Proof-of-work (PoW) | Proof-of-stake (PoS) |
|---|---|
| Miners create new blocks, mine new tokens | Validators create new blocks |
| Users must operate computing devices to become miners | Users must own tokens (coins) to become validators |
| Robust security due to peer-to-peer decentralized ledgers | Secured by an incentivised community |
| Miners receive block rewards | Validators receive transactions fees as rewards |
| Higher energy requirements as network growth scales | Energy use scales well with network growth |
Conclusion
While PoW and PoS work differently, both function to do the same thing: create peer-to-peer mechanisms that allow decentralized networks to process cryptocurrencies fairly, and securely. Which is the best approach will depend on what you value, and will always be largely a matter of opinion since both provide their own advantages and disadvantages. It is more important to understand how these consensus mechanisms work so that you can make your own mind up.
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