When analyzing proof of work (PoW) and proof of stake (PoS), these are high level of software algorithms used in cryptocurrency platforms for reaching consensus on Blockchain networks.
The three most popular cryptos are Bitcoin, Litecoin and Ethereum which are using proof of work to mine coins and other cryptocurrencies.
Before we go into how PoS and PoW really work, let’s briefly cover a related concept: cryptocurrency mining. Mining refers to the process which verifies the transactions on a Blockchain and then adds the validated ones to a public ledger.
Mining is important because it helps to create more coins, like with Bitcoin (BTC), so that miners can earn rewards for their work. With for instance Bitcoin, coins come into circulation as miners continue to process transactions on its network, while the total supply is locked up and fixed at a maximum total supply – 21 million with BTC.
How cryptocurrency mining works:
- A group of transactions are bundled into a memory pool (mempool).
- Miners verify each transaction in the mempool to check if they are legitimate by solving a mathematical puzzle.
- The first miner to solve the puzzle gets rewarded with newly minted Bitcoin (BTC) (the block reward) and network transaction fees.
- The verified mempool, now called a block, is attached to the Blockchain.
Proof of work (PoW)
As the name implies, proof of work (PoW) refers to work performed by processor(s) of a computing machine in order to validate transactions on a cryptocurrency platform. A good number of cryptocurrencies make use of this method to validate and confirm the authenticity of the chain.
In the world of crypto, there is need for transactions to be validated and confirmed and there is a reward for the miner who does that. However, one of the major problems encountered by miners, and the overall environment, are the electricity usage costs. This is interestingly one of the major reasons why many cryptocurrency miners are based in China and a number of other places because of the cheap electricity costs.
These requirements can make it quite costly for many crypto miners and not everyone can afford it, which makes the mining world relatively exclusive and small.
Cons of proof of work
It requires a lot of electricity which increases mining cost.
It usually requires a very high amount of computing power hardware, which makes it difficult to afford
When more coins are minted, mining more coins becomes difficult as the coin becomes scarce and hence the reward of the miners go down.
Proof of stake (PoS)
This is another method of validating and confirming transactions on the Blockchain. Here the validator, who is equivalent to the miner in the Proof of Work system, is selected based on his stake (number of coins) they have and depending on how long it has been since the coins were staked.
The coins held and staked by a validator show how committed the validator is. The length of time it has been since a validator has been staking his coins can be referred to as the maturity date. A person with more amounts of coins which he holds for a long period of time will have greater chances to validate a block.
Hence a more distributed network is formed with loyal validators. The validators benefit from the transaction fees. The end goal of both the processes is the same, but the method to achieve it is entirely different. Unlike in Proof-of-Work, there is no block reward in case of Proof of Stake and there is no mining equipment to worry about.
One of the major things is that in Proof of Stake, more people potentially have the opportunity to become a miner and it is considered by some to be more decentralized in comparison to Proof of Work.
Pros of Proof of Stake:
- The validators don’t have to spend on hardware, just a computer with internet access
- There is no need to spend on electricity which further helps to reduce costs
- Validations are faster
Similarities between PoW and PoS
As mentioned earlier both proof of work (PoW) and proof of stake (PoS) are algorithms which are used in achieving consensus on the Blockchain.
They help in validating and verifying the Blockchain based transactions.
Recapping the Differences between the PoW and PoS
- PoW makes use of miners while PoS makes use of validators which are basically the equivalent of a miners.
- In PoW complex algorithms are used to validate a blockchain, while in PoS there is no need for expensive equipment and any one can be a validator.
- In PoS the validator gets the transaction fees as a reward and it’s all done by having your desktop wallet opened.
- In PoS, every validator has some stake in the respective network