Cryptocurrencies are now a complete paradigm shift in the financial sector, offering a way for people to transact with one another without the need for a middleman in the form of a bank. An important characteristic of the operation of most cryptocurrencies is technologies based on blocks, which guarantee transaction confidentiality, protection from forgery, and decentralization. Transaction validity is reached in different ways by the different blockchain networks, and the most used are the proof of work (PoW) and proof of stake (PoS). These two mechanisms perform the same function of guaranteeing transactions and the network, but they operate on entirely different principles.
In this article, we will provide more details about these two mechanisms, helping you understand how they work, their pros and cons, and how they can positively impact a blockchain network.
What is proof of work (PoW)?
Proof of Work (PoW) is a seminal consensus mechanism used by Bitcoin. Many other cryptocurrencies, such as Ethereum, used proof of work before the protocol transitioned to proof of stake in 2022. In proof of work, a miner must complete complex mathematical problems to verify transactions and create a new block in a blockchain. Mining requires some fundamental computational work, where miners use computers and solve puzzles to find the right solution; the first miner to solve the puzzle has the right to add the new block to the blockchain.
How Proof of Work Works
1. Transaction Gathering: These are transactions performed in the network and compiled in a block by a miner. They are unverified transactions and can only be confirmed.
2. Solving the Cryptographic Puzzle: Miner employs computational strength to provide a solution to a cryptographic hash problem. This is the case with Bitcoin, where the miner has to look for the hash that is at or below a certain value called a target. The problem is very hard to solve; the solution, on the other hand, is very easy to check.
3. Block Addition: A miner solves the puzzle once and then broadcasts the solution to the network, and nodes then verify the solution. For example, if the solution is valid, the blockchain adds the new block and awards the miner with newly minted cryptocurrency (e.g., Bitcoin).
4. Difficulty Adjustment: The cryptographic puzzle gets harder and harder over time such that new blocks find their way onto the blockchain at a constant rate (take Bitcoin, about 10 minutes per block). The adjustment of this process is made automatically, but it is dependent on the total computational power of the network.
Pros of Proof of Work
– Security: One feature of PoW that helps to make Blockchain hard is that it would take the entire army of attackers a very long time—and this way they’ll never be able to take it over because doing that would require an extremely large amount of computational power to redo the work on each subsequent block.
– Decentralisation: This way, mining can only be done by those people with the necessary hardware, meaning it has a decentralised network.
– Proven Track Record: Over the years, Bitcoin has proven PoW to be a reliable way to secure a blockchain.
Cons of Proof of Work
– Energy Consumption: The biggest complaint against PoW is its voracious consumption of energy. Second, mining takes vast amounts of electricity, and this energy is unique to the mining space; it is required by specialised hardware, for example, ASICs. PoW is a concern regarding the environment since the size of the active network grows.
– Centralisation Risks: Recently, however, Pw mining has become concentratedly centralised in electricity regions, making criticisms that a few major entities have already owned more mining power.
– Scalability: However, in their essence, PoW is not scalable: as the blockchain grows, it can become slower and inefficient. Transactions can be caused to take longer to process and fees to go up by network congestion.
What is proof of stake (PoS)?
One such modification is called Proof of Stake (PoS), and it also seeks to correct some of the drawbacks of PoW. Unlike most designs where the ability to solve puzzles determines the validators of transactions and creators of new blocks, PoS relies on ‘stake,’ as the amount of cryptocurrency owned by participants.
In PoS, the participants’ selection of validating blocks depends on the quantity of the cryptographic money they possess and “lock up,” having a specific stake in the system. The quantity of cryptocurrency invested stands as a determinant of the probability of being selected to validate the next block. Validators are compensated with transaction fees and, at times, with new coins for this task.
How Proof of Stake Works
1. Staking: A validator puts up a corresponding amount of cryptocurrency to ensure the promotion of good behavior. This is referred to as staking, and so the size of your stake will dictate the likelihood you will be selected to validate the next block.
2. Block Validation: While in exemplary blockchain systems, validators with the highest computation hash rate solve complex cryptographic puzzles for accepting transactions, in this blockchain, validators are chosen proportionally to their stake for checking and endorsing transactions. After being selected, the validator also authenticates the transactions in the given block.
3. Block Creation: Afterward, if the validator has been able to validate the block, they recommend it in the network for integration into the blockchain. Other validators inspect the proposed block for correctness, which can be done for validating the correctness of a proposed block.
4. Rewards: Validators receive the transaction fee and occasionally fresh digital currency for approving a block. However, if a validator is dishonest or malicious, it can be slashed, meaning it can lose portions of or all of its staked cryptocurrency.
Pros of Proof of Stake
Energy Efficiency: Another fascinating feature of PoS as to how it works is its energy efficiency and how it overshadows PoW. Compared to current popular cryptocurrencies, PoS does not put a heavy workload on the miners, making it efficient in terms of power usage.
Scalability: Rather than PoW, PoS is recognised to establish considerable scalability. Since complicated puzzles do not need to be competed over by miners, more transactions can be processed within a set period by PoS, which is more convenient for the public.
Security: Though PoS is considerably younger than PoW, people generally assume that the former provides outstanding security. In PoS, for an attacker to launch an attack, he or she is required to have control of a large chunk of the coins in circulation, and this becomes very hard to achieve as more individuals join the network.
Reduced Centralisation: The democratising property of staking is that PoS doesn’t presuppose costly mining equipment; thus, they attract more participants, which strengthens decentralisation.
Cons of Proof of Stake
– Initial Wealth Distribution: Yet, PoS can lock the wealth divide that makes individuals making big stakes more likely to be selected to validate blocks. This may result in the growth of monopoly among the listed richest participants by accumulating the financial resources as well as powers of the combined entities.
– Centralisation Risks: As much as PoS is considered more decentralised than PoW is consistent, the large shareholders, including institutional investors, easily control validation, making it centralised.
– Complexity and Security Risks: The PoS consensus algorithm is more complicated in comparison with PoW, and special attention should be paid to the system’s protection against malicious actions. For instance, threats such as ‘nothing at stake,’ where validators were able to vote across multiple blockchains without repercussions, would be a real threat to the ecosystem. Nevertheless, many PoS systems use strategies such as slashing to avoid them.
Key Differences Between PoW and PoS
Feature: Proof of Work Proof of stackEnergy ConsumptionComputational mining requirements make it high.There is a low need for computational mining.SecurityIt is secure but is energy-intensive and slow. It relies on proper staking mechanisms to secure.ScalabilityMining complexity makes it less scalable.Faster block validation makes it more scalable.Hardware RequirementsSpecialised mining hardware is required. Minimal hardware is required, usually a standard computer.Decentralisation Centralisation in low-cost electricity areas puts it at risk. More decentralised, but still subject to wealth concentration. Transaction SpeedBlock generation time can cause a slower speed.Faster transaction processing Environmental ImpactHigh energy consumption and carbon footprint Low environmental impact
Conclusion
In PoW or PoS, each system has its benefits and limitations, and their blockchain networks must understand which of them will achieve their objectives. As is known, consensus can be reliably and efficiently achieved through PoW, but at the expense of high energy usage and poor scalability. On the other hand, PoS is loaded with some advantages, such as efficiency in terms of energy consumption, as well as scalability, and costs at the same time bring new issues in the context of wealth disparity and system complexity.
In the process of developing the blockchain, we will see how at some point there will appear either a deeper hybrid of the PoW and PoS or a completely new consensus mechanism that would rectify every weakness of both of them. For example, Ethereum with life updates to the Proof of Stake consensus model (often referred to as Ethereum 2.0) in 2022 can be viewed as a potential signal to other consensus algorithms where PoS or their variations can become the next step for blockchain networks pursuing the Holy Grail of sustainable scaling.