What Is The Difference Between Proof Of Work and Proof Of Stake
Cryptocurrencies have recently experienced a massive pullback, and right now could be a perfect time to dip your feet into the world of blockchain and cryptocurrency.
Whether you are interested in mining or simply investing in cryptocurrency, it is crucial to know the difference between the two major types, and what they mean for you. The creation and validation of cryptocurrencies and their transactions are organized into two different categories.
These categories are both considered “consensus mechanisms”, and they significantly impact the way in which we interact with the given cryptocurrency, as well as how the coin communicates with the blockchain network.
In this article, we will briefly introduce both the proof of work and proof of stake consensus mechanisms, covering the ways in which they are similar, but also how they differ.
Let’s get into it.
Bitcoin and Proof of Work
Bitcoin, the original proof of work coin was created in 2009 by Satoshi Nakamoto (an unknown pseudonym) with the purpose of solving the problem of transacting without the need for verification from a third party. In order to achieve this, a collective, distributed consensus mechanism must be in place. Satoshi decided on a proof of work method, in which network participants expend effort to solve a cryptographic problem. In order to prevent anybody from gaming the system, these puzzled are incredibly intensive. The nature of this method allows for transactions to be safely processed peer-to-peer, without the need for a third party.
This method is supported by miners, competing to solve a complex cryptographic problem, in turn completing a block and verifying all of the transactions for the last 10 minutes. As a reward for completion, they are usually paid in multiple denominations of the given cryptocurrency.
For this system to function properly, asymmetry is key. So, the work must be difficult for the miner to solve, but easy for the network to check. During the solving process, the more powerful the hardware, the greater the chance there is of solving the puzzle first. In real-world practice, mining computers will attempt to solve the puzzle millions of times before landing on the correct answer. Once the block has been verified, the transactions are assigned and appended to the public blockchain.
The more miners, the greater difficulty there is to verify transactions and win this reward. This leads to the formation of an incredibly competitive environment, where miners are incentivized to constantly optimize their system, spending millions on new equipment and utilities in the process
In order to “hack” the network or convince them of certain falsified transactions, one would need to control 51% of the computing network for the given currency, which is very unlikely.
Proof of Stake
Now on to proof of stake...
With this consensus mechanism, there is still an algorithm, and the purpose is still the same. But, the process is very different. While proof of work rewards its miners for being the first to create a block, contributors (known as stakers or forgers) to proof of stake systems simply earn a transaction fee.
In order to validate a transaction in a proof of stake mechanism, the user must first put a certain number of coins in their wallet. While “staking” these coins to support the network and earn a reward, they are frozen and not accessible. Staking is not accessible to everyone though! It requires a significant number of coins to be frozen, often requiring a substantial upfront cost. Ethereum, the second-largest cryptocurrency, is now switching to a proof of stake mechanism and will require 32ETH to stake. At today’s prices, this would be almost $61,500 USD!
The winner of the reward is picked from a pool of users that have staked a certain amount of cryptocurrency, and their chance of winning the reward is directly connected to the amount staked. This system could be compared to a lottery, where everyone who has bought a ticket has a chance to win, however, those with the most tickets have a higher chance.
The miners take a fee from every transaction, and on some platforms, it is possible to pool stakes with other users and earn a consistent return on investment of 10% or more.
The penalty for harming the network is the loss of the staking amount. In order to take over the network, it is required to own more than 50% of the currently available coins.
So, both proof of work and proof of stake attempt to create decentralized systems to handle various transactions, but take a very different approach in doing so.
So, both proof of work and proof of stake attempt to create decentralized systems to handle various transactions, but take a very different approach in doing so. Proof of Work is a very power-intensive and competitive mechanism with a slow transaction speed: Proof of stake can handle more transactions, chooses winners on a basis of total coins staked, and requires much less computational power.
Subscribe to be alerted when we release our next video, discussing why proof of stake is a preferable mechanism, and what it means for you!