Two of the most popular mechanisms to process cryptocurrency are proof of work (PoW) and proof of stake (PoS). There are many crucial ways to vary them, but they are designed to assure users that their payments will go through as expected with the network. The majority of the cryptocurrency in the market relies on either proof of work or proof of stake.
As per the market, the most established proof of work currency is Bitcoin, while Ethereum is the preeminent proof of stake asset. These mechanisms ensure the decentralized network is not misused and nobody spends their funds twice. In this blog, let’s go through the basics of both and discover their fundamental differences.
|Relies on crypto mining||Relies on crypto staking|
|Launched in year 1993 and used in 2008||Launched in the year 2012|
|Introduced by Cynthia Dwork and Moni Naor||Introduced by Sunny King and Scott Nadal.|
|Includes BTC, ETH 1.0, and many other cryptocurrencies||Includes ETH 2.0, Cardano, Tezos, and generally newer cryptocurrencies|
|Solving complex puzzles decides the accuracy of payments||Some holdings need to be locked up to vouch for accuracy.|
|Requires high-end energy to operate.||Initial investment is higher.|
The first widely used blockchain consensus mechanism to process transactions in a decentralized crypto network is proof of work.
While operating with proof of work, users have to mine a block by solving the complex computational puzzle before they submit any new transaction to the network. This process ensures that all the settlements go fraud-proof, and the miners get potential rewards for honest actions. The proof of work method is time-tested and straightforward. As per an uptime analysis, Bitcoin has been working 99.98%* accurately since 2009.
As the implementation of proof of work is getting more popular, these crypto puzzles are getting more complex and challenging to follow; associated with this, the computational power requirements have skyrocketed.
To process a proof of work, miners must first use a purpose-built device called application-specific integrated circuits (ASIC). As per the analysis of the University of Cambridge, Bitcoin itself is using energy as much as some mid-sized countries utilize. With PoW, the miner’s primary focus is to generate new blocks, which means they will be ready to collect new Bitcoin rewards.
Some of the essential characteristics held by proof of work are:
Any individual with a small amount of staking currency can participate. These participants are called validators, and you get the reward as per the investment. Higher investments generate higher rewards. This shows that any individual can be a part of the proof of stake without investing most of their owned currency.
If you own a currency that functions over the PoS, then you have ways to participate. One can be a validator and collect blocks of transactions for the network. Or the currency owner can delegate their amount to other validators and earn a share of their rewards. In the cryptocurrency space, wallets and exchanges provide staking services.
Some of the programs run by Proof of Stack have been under increased regulatory scrutiny, and after that, some providers have ended or frozen their services. However, the environmental effect of staking is lesser than PoW because the blocks are submitted based on the crypto holdings and not on the extensive energy of computing power.
For instance, when Ethereum converted from proof of work to proof of stake in 2022, the transition reduced its energy consumption by almost 99.98%.
Basic characteristics held by proof of stake are:
These blockchain consensus mechanisms hold specific vital differences. Let’s see some of them further,
One of the main and prominent differences between PoW and PoS is the amount of electricity consumed. Proof of work utilizes more energy due to its authentication model that runs over high-powered computers. From the research, it has been clear that Bitcoin mining uses more electricity than the annual consumption of Finland and Belgium. This energy consumption is a lot in comparison to the mined currency.
After the Ethereum network was transitioned to proof of stake, it had seen significant control over energy consumption. This is because PoS chooses random validators instead of miners who complete complex problems. The transaction time with PoS is also quick, eventually affecting energy utilization.
Comparatively, the transactions are settled with precision using both mechanisms. Still, the one thing that makes the major difference is their need for electricity for validating a transaction.
In the case of proof of work, miners compete with each other to complete an equation. When the miners get the blockchain block, the system relies on them and expects them to follow the rules and be trustworthy. However, with PoW, if a miner gains over 50 % control, they can prevent the transactions from getting confirmed and spend the coins twice. These practices are risks to the system, and these frauds are known as double-spending.
Proof of stake differs from it as it allows the person to validate a block if they have a security deposit or stake. These stakes are on the verge if an attacker tries to manipulate the process, they will lose all their currency. Hence, crypto attackers will gain no benefit if they disrupt the blockchain process because neither can they double-spend it nor steal the coins without losing their currency.
The risk of attacks is there in PoW and PoS, but miners benefit by doing such frauds. On the other hand, validators lose their stake in any such attempts.
The transaction process builds the ecosystem of that mechanism, and it differentiates the efficiency of a system. In PoW, a new block is created every 10 minutes, and the same amount of time gets consumed to confirm the transaction is valid. Multiple transactions are there in this blockchain ecosystem, and it gets challenging to verify all, and they consume energy at the same time.
With the PoS ecosystem, you stake the number of coins you want to generate rewards. Once you are a part of that, you can purchase any stake and receive the rewards associated with it. For example, if 1000 coins of a currency are in circulation and an individual has staked 100 coins, then they have a 10% chance of winning the rewards.
In the PoW functioning ecosystem, the chances of winning can be biased towards the one who holds a high computational power. Still, with the PoS one, every individual has the opportunity to access the rewards.
The miners who work with proof of work mechanisms don’t have to invest any amount in the blockchain to get started. Still, there are indirect investments like specially designed computing facilities and high-end networks. These investments are mandatory for a miner to be a part of the community and able to function in the generation of new blocks. The power consumed in this system is high and requires financial investments there, too. The aftercare of this technology is also needed for smooth functioning.
Proof of stake is done by the validators who own certain coins, and they don’t have to invest all of them in order to gain rewards. A validator can use some of its coins as a stake and validate the transactions. The investment is not bound to everyone; people are free to decide the amount of coins they want to put into a stake. All the rewards are based on the amount they have set as stakes.
Both the consensus mechanisms are bound to invest something in order to be a part of the blockchain system. With PoW, the money is invested in the power of the computer, and its components need to be upgraded with time. While PoS allows the validators to stake their currency in any amount, they can be liable to get the rewards accordingly. This means a small stake provides limited rewards while a significant stake will generate a higher reward for the individual.
The desirability to win increases with higher reward points; miners working for proof of work need to have a compatible solving power to mine more and more blocks. This will gain them authority, and they can lead the market by getting the maximum blocks mined by themselves. This also benefits the blockchain as a desire to win also increases the power and security of the blockchain.
The market competition is minimal in PoS as there are no limited criteria to be a validator, and people can earn as much as they invest. The validators increase their invested amount to gain more, and the chances of winning depend on the same.
|Strong competition amongst the miners builds up higher security for blockchain.||The need for expensive and high-end computing mechanisms increases initial investment.|
|Miners get rewarded in the form of cryptocurrencies.||The devices used for mining consume high energy for their usage.|
|The method for validating the transactions is decentralized.||Problems can take time to get solved, which slows down the transaction speed.|
|Security is strong as miners compete to solve complicated problems.||Due to lots of effort in completing a single transaction, the fee to transfer funds is high.|
|This is the only consensus mechanism that has been proven at scale.|
|None of the expensive equipment is required to process the transaction.||There can be a situation like coin hoarding amongst the validators.|
|Transactions are fast due to simple processes.||It is yet unproven on a larger scale.|
|The process of validating the transactions is energy efficient.||Large stake-holding validators can influence the market by holding or releasing the coins.|
|Performs more scalable transactions and reflects the funds near instantly.||For leading the market, there is a need for extensive investment upfront.|
|There are chances that it can tend to move toward centralization.|
Proof of work and proof of stake are two different mechanisms used over blockchain to achieve consensus on which new crypto blocks are added. These systems solve the basic problem of verifying transactions without using any centralized authority. Each has its place in the crypto ecosystem and holds a specific place in the market.
Many newly released altcoins use proof of stake and have operated with reliable stability and lower costs. At the same time, Bitcoin started working on the PoW and maintaining that. So, before deciding on any consensus mechanisms, consider their differences and choose the best-providing results.
PoW, first introduced through Bitcoin, uses mining to achieve the goals. PoS, presented by Cardano, the ETH2 blockchain, uses staking to gain the same results.
PoW is more secure from attackers due to its significant hardware and complexity, while energy-wise, PoS is exponentially more scalable than PoW.
Bitcoin transactions are associated with proof of work consensus mechanisms.
An attack over the crypto blockchain by miners who own more than 50% of the network mining hash rate. Through these, they have the power to alter the blockchain.
PoW: Bitcoin; PoS: Cardano, ETH 2.0, and many newly launched currencies like bitcoins.
Payment declines are a significant issue for eCommerce businesses, resulting in lost sales and customer dissatisfaction. Crypto can help. Learn how.
Chargebacks can be costly and time-consuming for businesses. Learn how cryptocurrencies can help businesses fight chargebacks and protect their bottom line.
Unlock the potential of secure, decentralized crypto as an alternative to traditional banking. Join the financial evolution! Read more to find out.
Uncover the future of finance with our list of top crypto-friendly banks. Seamlessly integrate your crypto with the trust of banking, read more to find out!