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Proof of Work & Proof of Stake, Explained

Proof of Work & Proof of Stake, Explained

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Learn all about the two main consensus mechanisms Proof Of Work (PoW) and Proof Of Stake (Pos) in our explainer.

COVERS:

  • Introduction
  • Proof of work
  • Proof of contribution
  • PoW Vs PoS
  • Pros of PoW
  • Cons of PoW
  • Pros of PoS
  • Cons of PoS
  • Conclusion

INTRODUCTION

Proof-of-Work and Proof-of-Stake are two different mechanisms used to validate cryptocurrencies. Both are essential components of blockchain technology and security, as they, in different ways, help ensure that users are honest in their transactions by incentivizing good actors and making it very difficult and expensive for bad actors. In this way, these consensus mechanisms reduce the chances of fraud such as double spending.

Decentralized blockchains like Bitcoin or Ethereum require computers to “prove” their presence on the network to validate transactions, and PoW and PoS are the most visible consensus mechanisms and key components of blockchain technology and how it works. The significant differences between them are transaction fees, efficiency and speed.

Mudrex CEO and co-founder Edul Patel described the difference between the two mechanisms by saying, “PoW uses a competitive validation method to validate transactions. PoS uses randomly selected miners to validate and add new blocks to the blockchain.

CERTIFICATE OF WORK

In Proof-of-Work, when transactions are added to a particular blockchain network, they must be validated and accepted by other computers on the network before new blocks are created and added to the blockchain. It requires a computer to solve cryptographic tasks, and it does “work” to be rewarded for being able to verify transactions on the blockchain. It’s called cryptocurrency mining, which is similar to the competition. Proof-of-Work provides a way for blocks to remain “trustless”. This means that no third party is needed to verify or manage transactions.

Recommendation: Angel Investor Srinivasan: Proof of Work vs. Proof of Stake

PROOF of contribution

Proof-of-stake relies on validators who own the coins associated with the blockchain. In PoS, a validator is chosen randomly based in part on how many coins they have locked into the network, also known as staking. Staking replaces mining as the consensus mechanism in the Proof-of-Stake blockchain. A stake is a fixed amount of funds that a validator commits to the blockchain to participate in the creation and validation of the block.

PoW VS PoS

In Proof-of-Work, crypto transactions are verified by mining. In proof staking, validators are selected based on a set of rules depending on the “stake” they have in the blockchain. In both cases, cryptocurrency is designed to be decentralized and decentralized, meaning that transactions are visible to and verified by computers worldwide.

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The role of both of these mechanisms is to validate events. Proof-of-Work allows a contract to add a block by requiring network participants to use large amounts of computing resources to create new valid blocks. Proof-of-Stake, on the other hand, uses less energy compared to PoW, but works the same way because it was created as an alternative. However, Proof-of-Stake requires participants to stake their cryptocurrency as collateral to add a new block to the digital ledger blockchain.

The process of mining Proof-of-Work consensus is energy-intensive, as it requires a lot of electricity and other resources to verify transactions, generate new tokens, and add new blocks to the network. Regarding Proof of Stake, Amit Nayak, who is Sahicoin’s CEO and co-founder, said, “The PoS mechanism achieves the same with fewer resources and less complexity. Unlike PoW, participants stake a certain amount of crypto and are randomly selected to validate transactions in the PoS system.”

PROS of PoW

Proof-of-Work is a more decentralized way of validating transactions on a blockchain, as it requires more computers and participants in the network to verify and approve transactions. For many crypto purists and enthusiasts: the more decentralized the better.

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Other benefits include:

  • Its purpose was to stop double spending.
  • It is one of the most secure consensus mechanisms.
  • PoW-based cryptos have more mining power.
  • It has a better ability to disperse.

CONS of PoW

Proof-of-Work requires a significant amount of energy to verify transactions. Because the network’s computers have to consume a lot of energy and do a lot of work, blockchain is less environmentally friendly than other systems.

Other disadvantages include e.g.

  • Mining it requires very powerful equipment.
  • It is not advantageous for all market participants.
  • Due to the very high mining share, the energy consumption is off the charts.
  • Most of the mining pool is controlled by individual units.
  • Slower transaction speeds and high costs for confirming transactions.
  • It is vulnerable to 51% attacks.

Recommendation: Why Mining Makes Bitcoin Unstoppable

PROS of PoS

Experts say Proof of Stake offers key advantages over Proof-of-Work. Its faster transaction rates and more efficient energy requirements enable blockchains that are scalable. This makes it easier for them to find adoption among new users.

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In addition to this, Proof-of-Stake offers an opportunity to earn more crypto payments. You can lock your coins in a liquidity pool and get rewards for more coins. This provides more opportunities to earn passive income.

Other benefits include:

  • Proof of sake mechanism is relatively secure in 51% of attacks.
  • No expensive equipment is needed for its processing.
  • Transactions are faster and relatively inexpensive.
  • Consumes less energy and offers economic opportunities.
  • Environment friendly

CONS PoS

The main problem with certificates of deposit is that it usually requires a huge initial investment. You need to buy enough initial tokens of that cryptocurrency to become a validator. This usually depends on the size of the network. In theory, people need to be wealthy or earn enough money to buy a stake in the network, leading to an exclusively rich blockchain. As the market capitalization of cryptocurrencies increases, this problem may worsen

Other problems include:

  • The actual decentralization of the network is more difficult.
  • Less secure than PoW because it is easy to manage the network because it depends on the capital.
  • PoS models have not been implemented on a complex blockchain.
  • PoS misses out on many PoW benefits like mining rewards etc.
  • Threads like double consumption are executable.

CONCLUSION

Proof-of-stake and Proof-of-Work both have their pros and cons. Each system has its strengths and weaknesses, and which you think is better ultimately depends on your perspective. However, experts are of the opinion that proof of stake is a better and more efficient way to operate in the blockchain network. This is probably the reason why Ethereum is moving from traditional PoW to PoS consensus mechanism through the Ethereum 2.0 update. “Both proof-of-work and proof-of-stake are mechanisms used in these networks to verify transactions,” says Adam Blumberg, CFP, founder and president of Interaxis, which trains financial advisors on cryptocurrencies. “However, proof of stake works better in financial systems.”

Recommendation: Node for Node: Which chains are the most decentralized?

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