- Proof-of-work (PoW) requires miners to solve complex mathematical puzzles to validate new transactions on the blockchain. They receive newly generated coins as rewards.
- Proof-of-stake (PoS) randomly selects validators who have staked coins to validate new transactions. They receive transaction fees as rewards.
Ever wondered how proof-of-work (PoW) and proof-of-stake (PoS) mechanisms come into play? First, we should understand how blockchains work.
What is a Blockchain?
A blockchain is a digital, decentralized and public database. Data is stored in sets, or what we call blocks, and strung together in a chain. Hence the name ‘blockchain’. As more transactions happen, more data and thus more blocks are added to the chain.
Bitcoin’s pseudonymous founder Satoshi Nakamoto implemented the first blockchain when he invented Bitcoin. The blockchain was meant to be a public transaction ledger for the coin. Since then, innovations in crypto have rapidly advanced blockchain technology.
As a blockchain is designed to have no central authority and is decentralized, it requires many participants to validate transactions that happen on it. This is where consensus mechanisms come in.
Consensus mechanisms
Essentially, a consensus mechanism is a set of rules that participants follow to enable distributed systems to work together and keep secure. In this context, consensus mechanisms help to decide how and what transactions are validated. Today, the two most popular consensus mechanisms are PoW and PoS.
Consensus mechanisms can also help prevent attacks on the network. Typically, an attacker could compromise consensus if they control 51% of the network. Thus, consensus mechanisms are usually designed to make this impossible, or at the very least, impractical.
Examples of blockchains that utilize PoW are Bitcoin, Ethereum 1.0 and Litecoin. Examples of blockchains that utilize PoS are Cardano, Polkadot and aspiring Ethereum 2.0.
Key differences between PoW and PoS
|
Proof of Work |
Proof of Stake |
|
Competition-based |
Randomized selection |
|
Mine by solving complex puzzles |
Validate by staking crypto as collateral |
|
Receive block rewards |
Receive rewards from transaction fees |
|
Hackers need 51% of network’s computing power to defraud the chain |
Hackers need to own 51% of the staked cryptocurrency |
|
The original consensus mechanism |
Designed as an alternative to PoW |
PoW
- Miners compete to solve complex computational puzzles. They often require expensive equipment with large processing power to do so.
- The first miner to solve the puzzle wins the chance to validate new transactions and add new blocks to the blockchain.
- They also earn a block reward after successfully adding a block to the blockchain. Block rewards are mostly made up of newly generated coins.
- Hackers would require 51% of the network’s computing power to successfully compromise consensus and attack the chain.
- PoW is the consensus mechanism implemented on the Bitcoin network. It is thus widely utilized among the older networks.
PoS
- In comparison, in PoS, network members stake crypto as collateral to earn the chance to validate blocks. They are termed as ‘validators’.
- Validators are then randomly selected to validate blocks. When a specific number of validators verify that the block is accurate, it is added to the blockchain.
- Validators receive rewards from transaction fees.
- Hackers would need to own 51% of the staked cryptocurrency to successfully compromise consensus.
- PoS was designed as a low-cost and more energy efficient consensus mechanism to PoW.
Pros and Cons of PoW
Pros
- Mining block rewards are usually higher than transaction fee rewards
- Higher level of security; impractical to make huge investments on hardware and energy just to attack big networks like Bitcoin
Cons
- High energy consumption
- May not be accessible to normal users as PoW requires expensive hardware
- Longer processing time
- Smaller PoW networks may be inexpensive to hack
Pros and Cons of PoS
Pros
- Hackers need to own at least 51% of all staked crypto on the network; typically unfeasible
- More energy efficient; no equipment needed
- No technical experience needed to stake; normal users can participate
Cons
- Incentivizes hoarding of crypto
- Rewards from transaction fees are usually lower than block rewards
- Crypto will be locked up for the period of staking
Conclusion
PoW and PoS are two different consensus mechanisms widely used in the context of crypto and blockchains. PoS is generally seen as more energy efficient in today’s climate conscious world since it does not require large computing power. It also reduces processing time as compared to PoW.
A prominent example for the adoption of PoS is Ethereum. Ethereum 1.0, a PoW model, is currently shifting to Ethereum 2.0, a PoS model, citing the pressing need to reduce Ethereum’s carbon footprint and scale more effectively.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
---
Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
The ApolloX app is available on Apple Store or Google Play here.
Stay up to date with ApolloX!
Telegram | Twitter | Facebook | Instagram | Discord | ApolloX News Station