Proof of work vs proof of stake: What’s the difference?

Proof of Work is used in Bitcoin to validate transactions and secure the network. The blockchain is secured by participants called miners, who use computational power to compete for the right to confirm new blocks and update the blockchain. As of December 2021, a miner can get a block reward of 6.25 BTC plus https://xcritical.com/blog/ethereum-proof-of-stake-model-what-is-and-how-it-works/ transaction fees by successfully mining a Bitcoin block. The proof of work consensus algorithm uses complex problems for miners to solve using high-powered computers. The first miner to complete the puzzle or cryptographic equation gets the authority to add new blocks to the blockchain for transactions.

Instead, miners must generally use purpose-built devices known as ASICs, or application-specific integrated circuits. Proof of work is the process of validating transactions on a blockchain to confirm transactions, close a block, and open a new one. Under proof-of-stake , validators are chosen based on the number of staked coins they have. Miners are placed in a competitive setting where they must solve equations while employing a proof of work mechanism. When a miner receives a block on the blockchain, the entire system relies on the miner to follow the rules and function in a trustworthy manner. This is due to the fact that the miner is the only entity capable of adding new blocks to the blockchain.

PoS vs PoW: How They Work

PoW might be criticized for creating high carbon emissions during mining, but it has proven itself as a secure algorithm to protect blockchain networks. Nevertheless, as Ethereum shifts from PoW to PoS, the Proof of Stake system could be more favored by new projects in the future. The Proof of Stake consensus mechanism takes a different approach and replaces mining power for staking.

For its part, proof of work enables agreement on which block to add by requiring network participants to expend large amounts of computational resources and energy on generating new valid blocks. Proof of stake requires network participants to stake cryptocurrency https://xcritical.com/ as collateral in favor of the new block they believe should be added to the chain. Proof-of-stake cryptocurrencies allow people to pledge or lock up some of their holdings as a way of vouching for the accuracy of newly added information.

Proof-of-stake pros, explained

In the early years, when the crypto market was small, the proof of work mechanism did not have a significant impact on the environment. However, as the crypto market has grown, climate concerns have also intensified. But how energy-inefficient is the proof of work mechanism, and how large is its carbon footprint?

Lyn Alden and others argue that if Bitcoin was PoS, not PoW, then those who controlled the stake of coins could push through those changes. Examples of blockchains that use PoS are Solana, Avalanche, Polkadot, Cardano, Algorand and Tezos. Typically, the algorithm determines the winner randomly, taking into account the amount of coins staked. Apart from Bitcoin, PoW is also used in other major cryptocurrencies like Ethereum and Litecoin .

Differences between Proof of Work vs. Proof of Stake

Andy Rosen covers cryptocurrency investing and alternative assets for NerdWallet. He has more than 15 years of experience as a reporter and editor covering business, government, law enforcement and the intersection between money and ideas. In these roles, Andy has seen cryptocurrency develop from an experimental dark-web technology into an accepted part of the global financial system.

• Proof-of-Work is a mechanism which allows decentralized networks to arrive at consensus in a trustless manner.
• Its introduction presented it as an alternative to proof of work, which requires a great deal of energy to perform.
• The maximum stakeholder in the network has the advantage and more power.
• Once this had been stable and bug-free for a sufficient time, the Beacon Chain was “merged” with Ethereum Mainnet.
• Now you can imagine a scenario in which two miners find a block at almost the same time.
• While proof of work networks like Litecoin have higher throughput than Bitcoin, they still lag behind proof of stake networks.
• Plus, the benefits of decentralization can be diminished if a small number of “mining farms” dominate the mining process.

Now that you have learnt all there is to know about proof of stake and proof of work, you must be aware of the differences and uses of the two. Apart from these two mechanisms, there is proof of space, proof of utility, and other kinds of consensus mechanisms as well, but these two are the primary mechanisms being used by most blockchains today. We have heard the name of bitcoin and Ethereum the most when it comes to blockchain or cryptocurrencies. These blockchain platforms use a consensus mechanism like Proof of Work and Proof of Stake .

Validating blockchain transactions

Some might argue that while mining is still decentralized, it is no longer heavily decentralized. Certain areas, mining equipment producers, and energy producers still dominate mining and reduce overall decentralization for proof of work blockchains. Proof of Work and Proof of Stake are the most common consensus mechanisms. The process also requires significant amounts of energy to run the computers. This serves as a deterrent to those who wish to manipulate the network by reversing a confirmed transaction, for example. The amount of energy expended and the hardware cost is part of why Bitcoin mining is so expensive.

As discussed above, proof of work relies on the contribution of miners to validate transactions. A particular transaction is validated when a miner uses computer power to solve a complex algorithmic problem. However, the proof of work system is set up as a competition between miners. Only the first miner to solve the computational puzzle is rewarded with native coin.

The Need for Specialized Accounting Tools in the Crypto Space

The fact that PoW networks require significant amounts of resources (mining hardware, electricity, etc.) makes them more expensive to attack. If you’re an investor who considers environmental impact to be a make-or-break factor, then investing in a crypto or a blockchain company that uses PoS may be something to consider. The staking process involves significantly less energy consumption than the mining process. Plus, staking allows far more nodes to participate in the creation of new blocks, strengthening its consensus governance in a more decentralized manner. Because of this feature, it is difficult, time-consuming and expensive to attack a proof-of-work system like Bitcoin’s.

Proof-of-Stake aims to eliminate the downsides of Proof-of-Work, including the hardware requirement and the energy consumption. However, by dropping these features, Proof-of-Stake also loses Proof-of-Work’s benefits. The fact that this hardware has only one use protects Bitcoin by discouraging attackers. If an attacker wanted to execute a 51% attack on the network, they would have to purchase millions if not billions of dollars worth of ASICs, only to render them useless by destroying the Bitcoin network.