Proof of work vs proof of stake: what are the key differences?

Proof of work vs proof of stake: what are the key differences?
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For the uninitiated, cryptocurrency transactions are recorded on an anonymous ledger – known as the blockchain – which essentially validates the exchange of a coin between one wallet and another.

Proof of work vs proof of stake

The mechanism that allows for this to happen, and that ensures complete trust in the blockchain, is one of two ‘proof’ calculations: proof of work and proof of stake.

Proof of work is a method in which crypto transactions are approved by miners, while proof of stake – adopted by the more eco-friendly cryptocurrencies – is a more energy-efficient mechanism that uses a staking calculation to cut down on the amount of manual ‘work’ that goes into securing a block.

What are the other principles behind the two distinct proofing methodologies?

Proof of work: pros and cons

The proof-of-work mechanism is essentially a contest between different crypto miners to see who can solve complex cryptographic ‘puzzles’ and mine a block first.

The ‘winner’, who solves the riddle first, is able to create a new block of transactions, and as long as their mining activity is approved by an independent audit, they will be rewarded with crypto for the time and effort they have put in and for the energy (e.g., electricity) they have used.

The competitive element ensures that the blockchain is updated efficiently and speedily, and with the costs of purchasing ASIC hardware and mining rigs falling, the quality and pace of crypto transactions will continue to improve.

The main issue with proof of work is the amount of energy consumption that goes into it, and at a time when energy prices are rising, this is a major concern – as are the considerable CO2 emissions that crypto mining generates.

One study found that bitcoin miners actually use more energy per year than whole countries such as Argentina, and this is a significant asterisk against the proof-of-work system.

Proof of stake: pros and cons

Proof Of Stake Pros And Cons

With proof of stake, there is no competitive element to completing a block – instead, validators are chosen based upon their token holding, and they effectively approve a transaction by guaranteeing it with their ‘stake’. In doing so, they are also rewarded with further token payouts.

The proof-of-stake system is preferred by many because there are fewer costs. Although individuals need to have sizable crypto holding to become a validator, they don’t need to invest in expensive hardware to get up and running – and their energy consumption will be lower when compared to their proof-of-work counterparts.

Although the most considerable coins, ranked by market cap at least, such as Bitcoin and Ethereum use the proof-of-work system, the numbers of proof-of-stake currencies are on the rise – the likes of Cardano, Solana, and Algorand are calculated via proof of stake.

For now, at least, there is some skepticism as to whether proof of stake can really work on a mass scale, and by its nature, the proof-of-stake mechanism rewards those willing to ‘hoard’ coins – and that goes against the ideology of cryptocurrency, the blockchain, and decentralization.

The 51% attack

Even though the blockchain is generally secure and incredibly anonymous, it is not beyond the reach of hackers with bad intentions.

A so-called 51% attack is where a miner will take over more than half of the nodes in a blockchain, and this power enables them to alter the lodger for their own gains – perhaps to double-spend their funds.

A 51% attack is somewhat easier to pull off via proof of work – especially for hackers who have considerable hardware power at their disposal.

However, with the proof-of-stake mechanism, there’s not really any point to carrying out such a move – you would have to actually spend your own money to take over the network and earn the necessary validation power.

And then there would be the negative impact upon the hacked coin’s value, which, again, renders the 51% attack a rather foolish move under the proof-of-stake system.

The future of consensus mechanisms

Both proofs of work and proof of work are loosely labeled ‘consensus mechanisms’, and as we have learned so far, there are cases for and against either going on to become the dominant methodology for maintaining the blockchain.

Proof of work was the original consensus mechanism and the one most in line with the vision of the founders of cryptocurrency – whether you believe this to be Satoshi Nakamoto or somebody else.

One of the problems that have prevented crypto from achieving mainstream acceptance – yet, at least – is that transactions take time to complete and there are also fees involved. The blockchain can only handle a few transactions per second and can take minutes for a single payment to be approved, and that’s at a time when mining is as popular as it has ever been. To that end, there are many who believe that proof of work is not a long-term solution for the furtherance of cryptocurrency adoption.

Proof of stake simply requires less computation, less hardware power, and less input, and that opens the door to more people being able to validate blocks – and the more validators there are, the faster crypto transactions can be completed, which is naturally a good thing.

Conclusion

It feels as though the global community, and certainly our political leaders, are pointing us in a direction of greener energies and more sustainable ways of living. While cryptocurrencies remain unregulated and beyond governmental control, an appetite for a ‘cleaner’ planet may just push more people towards proof of stake than proof of work.

The argument against proof of stake is that it doesn’t help to promote a fair and open system – after all, those with the largest token holdings are those who are best placed to validate transactions on a grander scale. However, at the same time, you could argue that there are also barriers to entry when it comes to proof of work – the fastest miners, and those able to enjoy the best rewards, are those who have invested heavily in the finest ASIC rigs and hardware available, and it’s no surprise that dedicated mining companies have emerged to control the flow of block verification.

Perhaps they offer the greatest threat to the integrity of cryptocurrency mining, no matter which consensus mechanism is deployed.

Thank you for reading!