What’s the difference between proof-of-stake and proof-of-work? That’s one of the most common questions asked by cryptocurrency newcomers, and it’s not surprising why.
Both terms relate to validation methods that are used to confirm transactions and add new blocks to the blockchain, but they sound quite different.
In this article, we’ll explain the difference between these two popular methods in simple terms so you can understand what makes them different from each other as well as other validation methods in existence today such as proof-of-authority and delegated proof-of-stake.
What is Proof-of-Work?
Proof of Work (POW) utilizes a competitive proof method to verify transactions and add new blocks to the blockchain system.
The competitive validation means that transactions are added randomly (in a pseudo-random way) and must be completed by using computational power.
This process was designed to prevent spam attacks on blockchains, but it doesn’t allow for scalability as it grows more difficult to confirm transactions as time goes on and transaction volume increases.
Proof-of-Work also requires special hardware, called ASICs, which are designed specifically for mining cryptocurrencies.
Therefore, people without such hardware can’t participate in validating transactions, POW is used in Bitcoin and Litecoin.
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Benefits of Proof of Work
Proof-of-Work provides an extremely secure and decentralized way to confirm transactions and add new blocks to a blockchain.
For example, proof of work done by miners for Bitcoin can take up to 10 minutes or more in order to validate a block on that network.
This means that no one can come along and spend Bitcoins from another user’s wallet because it would require immense amounts of computational power (and electricity costs) to override what already exists on the chain.
In other words, it would take much longer than 10 minutes for someone to hijack an account using proof of work since they would have to reset everyone else’s block times after their own fraudulent transaction was included on-chain.
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Proof of Work Pros and Cons
Proof of work has been with us since Satoshi created Bitcoin, and it remains one of two popular consensus algorithms today.
However, it’s probably safe to say that proof of work won’t be disappearing anytime soon.
Instead, we can expect proof of work to coexist peacefully with alternative consensus mechanisms such as proof of stake and delegated proof of stake (DPOS).
POW has been criticized for its large energy costs, as well as its propensity to centralize transaction validation on a few major players.
Proof of stake was designed to address some drawbacks associated with proof of work namely, high energy consumption as well as a tendency toward centralization.
As opposed to using computers to solve complex math problems, POS requires coin owners to stake their coins that is, put them up as collateral for verifying transactions instead of burning computational power.
What is Proof of Stake?
Proof of stake (POS) operates randomly assigned miners to validate transactions and ensure or secure the different cryptocurrency networks.
While proof of work (POW) requires participants to compete against each other to complete block validations through solving complicated math problems.
Both methods require cryptocurrency users who hold a given digital currency in a wallet or on an exchange to pay transaction fees as rewards for confirming blocks and increasing security.
In Proof of work systems, however, those who win block validation are rewarded with new coins, whereas in Proof-of-stake systems it’s just part of their holdings.
In both cases these coins are sent directly from wallets associated with winning blocks; it also means that over time a larger portion of mining power may be concentrated among larger mining pools instead of individuals.
Benefits of Proof of Stake
There are several reasons why proof-of-stake has become popular among some coin communities.
For starters, there’s no need to expend massive amounts of energy to support it. In fact, Proof of Stake may be a more efficient way to power blockchains while protecting and preserving their value as an alternative form of digital currency with real potential for innovation.
In proof of stake, miners are selected based on how many coins they have and not by how powerful their computers are.
In fact, users don’t need to use expensive computing hardware to participate in mining at all, making it much more feasible for everyday people to contribute block validation.
Proof of Work and Proof of Stake
Proof of Work (POW) used to be a popular consensus mechanism, but it has been largely superseded by its sister technology called Proof of Stake (POS).
Both are interesting concepts, but which one actually has any merit? Let’s take a look at what each one does and why you might prefer either over another.
Proof of Work:
How It Works For Bitcoin specifically, miners compete with each other to solve complex math problems.
These puzzles get harder as more bitcoins enter circulation, making mining progressively more difficult.
When they do eventually solve one of these puzzles, they receive some number of bitcoins in exchange for their work.
Proof of Stake:
How It Works To earn new coins through Proof of Stake, users have to have coins that stake themselves.
Anyone can hold those stakes, without needing to run power-hungry computer hardware or buy expensive mining equipment.
As an incentive to keep their coins staked and available for transactions, stakers will also be rewarded for confirming transactions on the blockchain.
Generally speaking, Proof of Stake works much like a savings account at your bank or credit union.
If your balance reaches $1000 dollars or so, you can withdraw all of it at once without incurring fees but only if your balance stays above $1000 dollars!
Where Proof of Stake can Use?
Proof-of-stake will likely be used in private blockchains, or permissioned ledgers, where every node on a blockchain has been vetted and no anonymous parties are allowed to participate in transactions.
Such blockchains can be used for business transactions that require high levels of trust between all participants.
For example, it could allow consumers to purchase goods directly from manufacturers without retailers being involved as intermediaries.
Proof-of-work protocols, on the other hand, would still make sense within permissionless systems like bitcoin’s blockchain.
These public networks use miners to confirm transactions, they’re randomly selected by an algorithm rather than selected based upon their potential profits as with proof-of-stake systems.
Where Proof of Work Can Use?
The biggest problem with Proof-of-Work comes from something called miner centralization.
In Proof-of-Work, miners are in control of creating new blocks for their respective chains and validating transactions found within them hence decentralized cryptocurrencies like Bitcoin and Litecoin.
And use it to ensure their coin supply cannot be modified without wide consensus from network participants.
However, many blockchains use POW because:
(1) they need a way to determine which node gets to create new blocks;
(2) they have an existing cryptocurrency that has amassed a large following; or
(3) they are building a smart contract platform atop another blockchain. For these blockchains, Proof-of-Work remains a good solution since there is already incentive built into its consensus model.
Also, if you’re wondering why I say blockchain, rather than cryptocurrency when referring to Proof-of-Work being used on various platforms.
It is because some platforms (for example Ethereum) might not be using a native crypto token such as Ether or Zcash but instead represent transactions using native data structures such as those used in most databases.
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What is Best Proof of Work or Proof of Stake?
Below we break down what we believe are some of the best proof of work and proof of stake consensus for different applications.
In Proof of work If a new block is being built upon an existing chain, then that block can be added to that chain only if computational power has been expended in its creation.
Validation of Transactions
Proof of stake (POS) operates randomly selected miners to check and then validate each transactions.
Proof of work (POW) utilizes a competitive verification method to verify transactions and add new blocks to the blockchain.
In other words, Proof of stake delegates mining responsibility by lottery while Proof of work distributes mining by hardware power.
Proof of stake requires less energy consumption than Proof of work but has been criticized for being more centralized than its counterpart.
Use in Cryptocurrencies
Some cryptocurrencies use a hybrid approach that combines elements of both proof-of-work and proof-of-stake.
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In recent years, blockchain technologies have drawn a lot of attention from mainstream media and investors alike.
However, for someone completely new to blockchain, learning about Proof of Work vs Proof of Stake may be a little confusing and overwhelming at first.
Meet Nitin, a seasoned professional in the field of data engineering. With a Post Graduation in Data Science and Analytics, Nitin is a key contributor to the healthcare sector, specializing in data analysis, machine learning, AI, blockchain, and various data-related tools and technologies. As the Co-founder and editor of analyticslearn.com, Nitin brings a wealth of knowledge and experience to the realm of analytics. Join us in exploring the exciting intersection of healthcare and data science with Nitin as your guide.