The debate over Proof of Work vs. Proof of Stake has long divided the cryptocurrency community. The argument comes down to which consensus algorithm is more efficient, but there are several variables to consider before deciding which is better.
In this article, we look at the basics of both these consensus algorithms and understand the technicalities of each method.
Understanding the basics
Proof of work was introduced in blockchain technology by Satoshi Nakamoto with Bitcoin. PoW is a piece of data that is difficult to generate but easy for others to verify. It is a consensus mechanism that miners use to verify transactions and secure the network. It is incentivized such that miners receive rewards in the form of coins to perform honest work.
PoW can be best understood to some as mining since mining uses a PoW algorithm.
The process of mining begins by solving complex mathematical equations using computers. During completion, a miner produces a verification known as a “hash.” The first block ever mined on a blockchain is known as the genesis block. Every block formed after that is added to a pre-existing block chronologically forming a chain hence a blockchain.
Because of the problems inherent in PoW, such as huge electricity usage, limited transaction per minute, and inequality, developers created Proof of Stake. In 2012, Scott Nadal and Sunny King invented PoS, and Peercoin was the first cryptocurrency to adopt it. Later on, Ethereum 2.0 was the first smart contract platform to use PoS.
On the other hand, Proof of stake is a distributed consensus mechanism commonly known as staking. Also, it does not require a lot of computing energy to formulate blocks. Rather, to produce new blocks on the blockchain, a user must first have a certain amount of tokens. To start the staking process, a user sends their money to a verifiable wallet or pool address.
PoW VS PoS
Several popular blockchain networks use the PoW algorithm. All blockchains that use PoW follow the same basic idea: to validate a transaction and add it to the blockchain by solving a cryptographic puzzle. The most well-known blockchain that employs PoW is Bitcoin. Other blockchains include Litecoin (LTC) and Bitcoin Cash (BCH).
One of the shortcomings of proof-of-work is that cybercriminals can hack it and succeed in a 51% hack. It handles 7 transactions per second which sets investors back. Also, it brings additional charges in transactions and mining. This is because miners use specialized computers and excessive electric energy, and PoW only rewards the winner who cracks the next block puzzle.
Programmers developed the Proof of Stake from PoW inefficiency. Instead of requiring miners to solve computationally complex problems to create new blocks, this system only requires them to demonstrate ownership (or stake) in the currency. The top blockchain that uses PoS is Ethereum 2.0. Other Blockchains include NEO and Dash.
How are transactions verified in PoW?
Proof of Work has a set of rules that require miners to solve computationally complex problems. While this may appear simple, however, the process is time-consuming, expensive, and a miner could end up not solving the problem. Hence, no rewards.
Miners compete for rewards (such as Bitcoin) by calculating these hashes. In return, they get rewarded with Bitcoins (or other cryptocurrencies they were mining) for each verified transaction. The PoW process of verifying transactions is also known as mining.
Proof-of-work has several advantages, such as that it is fraud-proof since no participants can duplicate the same coins; it is decentralized; it’s cryptographically secure due to the hash function; it’s more democratic than other solutions.
The major disadvantage of this approach is that it consumes a significant amount of power and time to complete each task. This makes it quite an expensive option for cryptocurrency generation, especially for miners with limited resources.
How are transactions verified in PoS?
In the proof-of-stake system, transactions get verified by nodes that hold coins on their wallets. In a PoS system, network nodes deposit “stakes” of tokens for a certain period in exchange for the chance to be chosen to produce the next block. The chosen node – also known as the “validator” – will get the block rewards in the form of the network’s native currency.
It’s also a more environmentally friendly approach to verifying transactions. It benefits the network in two ways: individuals with fewer computing resources are more likely to own crypto coins, which is more energy-efficient.
To begin, cryptocurrency owners must stake their coins and create their validator nodes. Staking is the process of pledging your coins as a means of verifying transactions. While you’re staking them, your coins are locked up, but you may unstake them if you want to trade them.
The second stage in verifying a transaction is referred to as approval voting. Each peer receives a brand-new transaction and creates the Merkle root from all transactions within that block. A Merkle root is a mathematical way to ensure that the data in a Merkle tree are whole, undamaged, and not changed. All participants will get a reward in the native cryptocurrency and it is distributed in proportion to the amount of crypto they staked.
Which is better? PoS or PoW?
Proof of Stake and Proof of Work are two consensus algorithms largely used in the cryptocurrency industry. Proof of Work is a system where the miners get paid for how much work they do. Proof of Stake may be more effective since it does not require expensive equipment to mine coins or validate transactions. They both have their pros and cons, with one being more secure and the other being more scalable.
However, there have been attempts to breach this form of cryptocurrency in the past. Thus, if you’re looking to invest in cryptocurrencies long-term, do your research and decide which option works best for you. The bottom line is that it all depends on your investment plan.