Proof of Work vs Proof of Stake: Crypto Consensus Explained - Reading time: about 4 minutes
The beauty of the blockchain is that it provides its users with various ways to achieve decentralized, distributed consensus. The world of cryptography promises a future where we no longer need to rely on central third parties to clear transactions, verify signatures or confirm identities. This ‘trustless’ system relies on two main consensus mechanisms, each with its benefits and downsides.
What are these consensus mechanisms, and how are they different? In this article, we’ll explain the two different algorithms—Proof of Work (PoW) and Proof of Stake (PoS)—used by blockchain networks, how they differ, and their respective advantages and disadvantages.
Understanding the blockchain
The blockchain is essentially a ledger of transactions between different parties. When one party wants to send cryptocurrency to another, they can either use the PoW or PoS consensus mechanism—depending on the network used by the cryptocurrency they are sending—to ensure that the transaction is successfully verified.
What is Proof of Work?
Proof of Work is the consensus that powers well-known Layer 1 blockchains such as Bitcoin, Litecoin, and the legacy version of Ethereum.
It relies on a decentralized network of ‘miners’ racing to solve complex mathematical problems in order to verify transactions made on the blockchain. The first miner to solve this equation gets to create the next block and receives a reward in the form of cryptocurrency. By solving the equation, the miner has successfully proved that they have done the ‘work’ which has earned them their coveted cryptocurrency.
The process of solving this mathematical problem is computationally taxing and energy intensive. The main advantage of PoW is that it is a simple and well-understood mechanism that has been used successfully for many years.
It is a tried-and-tested algorithm which has successfully withstood any major incidents since its inception in the late 2000s. PoW remains a safe bet in cryptocurrency circles, with a solid track record in keeping users’ tokens safe.
Over time, the mathematical equations required for the Proof of Work consensus have become so complex that colossal amounts of computing power are now required to complete these equations and ‘mine’ the currency reward. One of the main arguments against PoW is its energy usage, with many critics often equating the energy spent on Bitcoin mining to that of entire countries.
Bitcoin, which is synonymous with Proof of Work, has been 99.98% incident-free since its inception. This does not mean that it is not immune to any attacks on its system, however. If any single party manages to control 50% or more of a blockchain, they could—in theory—take full control of the network and use it for their own malicious means.
What is Proof of Stake?
PoS is a far newer consensus mechanism designed to address many of the scalability issues that come with using the PoW protocol. With PoS, validators are encouraged to vest the cryptocurrencies that they have purchased on a network in order to receive rewards in the form of more crypto returns. Rewards are usually proportional to the amount of crypto staked, as well as the period that the validator has staked it for. Once a validator is chosen, they create a new block, which is then attested by other validators on the network.
Without the huge energy costs incurred by the complex computations involved in Proof of Work, Proof of Stake is a far more efficient solution to verifying transactions on the blockchain. Although staking also requires a large capital investment in order to become a node validator, staking pools offer users the opportunity to earn smaller rewards by pooling their tokens with other users.
Proof of Stake: The Quick Solve to Crypto’s Problems?
Ethereum is one of the major cryptocurrencies which has switched from PoW to PoS, with the network estimating an energy saving of up to 99%.
Aside from being energy-efficient, PoS also promises quicker transaction speeds.
The trust mechanisms in PoS work a little differently to those in PoW. In cases where a validator erroneously validates a node, the validator is ‘slashed’ from the network, forfeiting their opportunity to create a new block and giving up a portion of their stake due to their malicious actions. Certain PoS networks are not as decentralized as PoW networks, given the concentration of vested cryptocurrency in the hands of fewer validators.
Both Proof of Work and Proof of Stake have their own barriers to entry. PoW requires significant investment in mining infrastructure, while PoS networks ask for large financial capital commitments to become a node validator. Ultimately, both consensus mechanisms have use cases for the crypto community, and will continue to form part of the cryptocurrency landscape for many years to come.