Cryptonomics: What’s the difference between Proof of Work and Proof of Stake?

Proof of Work (PoW) and Proof of Stake (PoS) are two different consensus mechanisms used to verify transactions on blockchains, but they differ in many ways.

Consensus Mechanism 

Proof of Work (PoW) and Proof of Stake (PoS) are the underlying mechanisms in a blockchain to keep the network immutable, trustless, and distributed. It is a consensus mechanism designed to achieve a common objective of verifying transactions without an intermediary. 

The consensus mechanism must be capable of guaranteeing that every transaction is recorded and enforced in a trustless manner. Bitcoin transactions are secured through the PoW mechanism with high energy consumption and can only process a limited number of transactions. PoS is the newer consensus mechanism that is less energy-intensive and scalable and is used in Etherum 2.0. 

Proof of Work (PoW) Mechanism

PoW is a major part of Bitcoin’s identity. This mechanism existed before Bitcoin was invented. It was first pioneered in 1993 by Cynthia Dwork and Moni Naor to fight against spam emails on network and denial-of-service (DDoS) attacks. PoW is also used in Ethereum 1.0.

Source: PoW is a consensus mechanism deployed on the Bitcoin network and works on the ‘longest-chain-wins’ rule.

The participants in the network will accept the longest chain of blocks as being the valid ones. Defaulting to the longest chain prevents the existence of multiple chains, with different versions of history to exist side-by-side. The longer the consensual version, the more power and resources are needed to alter the transaction. 

The mining process is almost synonymous with the PoW consensus mechanism. Mining takes place when network participants compete to solve cryptographic puzzles, and the first to be able to do so will successfully validate the new block. This requires resources, and this is also how the network is secured. Adding blocks to the chain is designed to be both costly and time-consuming. The winner that gests to update the blockchain will be rewarded with a predetermined amount of crypto. This is called the block reward. 

Source: In the Bitcoin’s network, miner’s rewards are halved every 210,000 blocks and provide a distribution method for the 21 million Bitcoins 

The first block in a PoW blockchain is called the genesis block. This block is hardcoded into the software because there is no reference to the previous block. Subsequent blocks will refer to the previous block to maintain a complete and updated ledger copy. 

Proof of Stake (PoS)

One of the major problems associated with the PoW consensus mechanism is scalability. Ethereum started from a PoW protocol but is now transitioning into a PoS protocol. The term ‘mining’ is not used in PoS. Instead, new blocks that are created are ‘forged’ or ‘minted.’ To validate transactions, the user must own a particular quantity of the crypto that is native to the blockchain. The users that contribute their crypto participate in a process called ‘staking.’ 

Staking is the process where the user’s crypto is used to obtain a chance of validating new transactions, update the blockchain, and earn a reward. The person who stakes for a reward in a PoS mechanism is called a validator. The network works through an algorithm to select a winner based on the amount staked and the length of time the cryptos have been staked. 

Once the block is validated, the other validators will attest that the block is accurate. There is a threshold attestation before the network updates the blockchain. The rewards to the participating validators are proportional to each validator’s stake. The network is protected from any malicious acts by ‘slashing’ the staked funds. 

Source: PoS is less energy-intensive and is scalable 

The Future of Consensus Mechanism

The main criticism against the PoW consensus mechanism is the electricity use related to network security. The PoS consensus mechanism has been criticized for favoring early adopters and those with more resources. 

Today, with Decentralized Finance (DeFi), speed, scalability, and costs are the most important consideration to the average user. Therefore, the more popular choice would be PoS. Other consensus mechanisms such as Proof-of-Space (Chia Project) are an alternative that resolves the centralization issue surrounding PoW and PoS.    

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