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Proof of Work and Proof of Stake – Differences between These Two Concepts

If you have been in the crypto world for some time, then you have certainly heard of Proof of Work and Proof of Stake. To put it simply, they are two types of consensus mechanisms through which transactions in blockchain networks are validated.

In order to understand these concepts in-depth, it is worth recalling some blockchain technology operations. Once we’ve done that, we will be able to explain in detail the notions of Proof of Work and Proof of Stake.

Blockchain Technology

Blockchain technology was created by Satoshi Nakamoto, and it is the main technology behind his cryptocurrency: Bitcoin. Let’s explore how it works.

Thousands of transactions are made in the Bitcoin network every minute. One might ask: who (or what) verifies such transactions?

Traditional financial services, such as banks, or credit and debit card companies, are fully centralized. That is to say: each one of them has its own network of computers stationed around the world. They are in charge of checking hundreds of thousands of transactions at all times.

However, Bitcoin works differently. The innovative feature of Blockchain technology is its decentralization.

Basically, each transaction in the Bitcoin network is stored in a kind of public spreadsheet. Transactions are not verified by a central network. On the contrary: anyone with a powerful computer can check the validity of transactions made on the Bitcoin network. These users are paid Bitcoins as an incentive to validate transactions.

Most cryptocurrencies use Blockchain technology with some important variations. For having developed this system, many people think Sakamoto should win the Nobel Prize in Economics and the Turing Prize, which is the highest honor in the field of computer science.

Proof of Work and Proof of Stake

Now that we’ve covered the basics of how Blockchain works, we can go to the central topic of this article: the differences between Proof of Work and Proof of Stake, which are two different ways of validating transactions.

Proof of Work: What is it? How does it work?

Proof of Work (PoW) is the consensus mechanism used by the Bitcoin network to validate transactions. In addition, other cryptocurrencies based on the BTC code (such as Bcash, Bitcoin SV and Lithecoin) use the PoW mechanism.

Thousands of individual transactions made on the Bitcoin network are stored for a short period of time in a mempool. The mempool is a kind of “waiting room” in which transactions are grouped, awaiting validation.

In order for transactions in the mempool to be validated by a computer, they must solve a math puzzle automatically generated by the network. This requires computational processing power, electricity, and time. When the puzzle is solved, the validation is done and the computer is rewarded for it.

This process is known as mining, and the computers are called miners. In today’s Bitcoin network, miners compete with each other to solve as many puzzles as possible. They increasingly invest in computing power to be more competitive.

Proof of Stake: What is it? How does it work?

Proof of Stake (PoS) is another popular consensus mechanism in blockchain networks.

In the PoS mechanism, there is no puzzle to solve and no mining. For each transaction in a network that uses this mechanism, users pay a small fee to the network’s validator.

Then, how are validators rewarded? Basically, through the amount of cryptocurrency they own.

In PoS, a user who owns 10 coins will be rewarded ten times more than a user who just owns 1 coin.

As there is no mining, all available coins are available from the start with cryptocurrencies using PoS. Some of the most famous examples are EOS and Tezos. Ethereum, which is the second-largest cryptocurrency in terms of market capitalization, plans to migrate to this model over the course of this year.

Proof of Work and Proof of Stake: Comparison

Cost, Energy, and Centralization

Without a doubt, one of the great disadvantages of the Proof of Work is its high cost. Since crypto networks are quite large, powerful machines are increasingly needed for their exploitation. In addition to this, a large expenditure of electrical energy is required. Due to these reasons, networks tend to belong to large investors.

Also, the environmental impact is considerable. According to the Digiconomist website, the Bitcoin network currently consumes 73.12 TWh of annual energy, which is comparable to Austria’s energy expenditure.

By not using mining, the cost of the Proof of Stake is much lower, allowing smaller investments for those who want to be validators. Therefore, networks tend to be less centralized in addition to having a lower environmental impact.

Security

As the PoW has been running for over a decade, it is known that its level of security is high. The Bitcoin network has been around since 2009, and to this day nobody has been able to outwit the system, although more than a few attempts have been made.

Proof of Stake is a newer system, therefore it is too early to talk about its resistance to attacks. However, crypto analysts have pointed out some potential problems that systems may face, some of which can be found here.

Scalability

The PoS mechanism tends to allow a greater number of transactions than that of the PoW.

After all, the PoW mechanism process goes through more stages. Miners must access the transactions in the mempool and solve the puzzles, so that a block of transactions is validated. This can slow down the process. In Proof of Stake, the validation of the transaction blocks skips these steps in the process. Therefore, cryptocurrencies that use this system may be more efficient in terms of scalability.

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