Learn all about the two most important consensus mechanisms, proof-of-work (PoW) and proof-of-stake (Pos) in our explainer.

COVERED:

  • Introduction
  • proof of work
  • Proof of Stake
  • PoW versus PoS
  • Advantages of PoW
  • Disadvantages of PoW
  • Advantages of the point of sale
  • Disadvantages of point of sale
  • Conclusion

INTRODUCTION

Proof of work and proof of stake are two different mechanisms used to validate cryptocurrencies. Both are integral to blockchain technology and security because in different ways they help to ensure that users are honest with transactions by incentivizing good actors and making it very difficult and costly for bad actors. . In this way, these consensus mechanisms reduce the risk of fraud such as double spending.

Decentralized blockchains like Bitcoin or Ethereum require computers to “prove” their presence in the network to validate transactions and PoW and PoS are the most important consensus mechanisms and key components of blockchain technology and how it works. The significant differences between them are their transaction fees, efficiency, and speed.

Mudrex CEO and co-founder Edul Patel defined the difference between the two mechanisms saying, “PoW uses a competitive validation method to confirm transactions. PoS uses randomly selected miners to confirm and add new blocks to the blockchain”

PROOF OF WORK

In Proof-of-Work, when transactions are added to a given blockchain network, other computers on the network must validate and approve them before new blocks are created and entered into the blockchain. It requires a computer to solve cryptographic puzzles, putting in “work” to be rewarded with the ability to verify transactions on the blockchain. This is called cryptocurrency mining, which is akin to a competition. Proof of work allows blocks to remain “trustless”. This means that no third party is needed to verify or manage transactions.

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PROOF OF PARTICIPATION

Proof of stake relies on validators who own the coins associated with the blockchain. With PoS, a validator is randomly chosen partly based on how many coins they have locked into the network, also known as staking. Staking replaces mining as the consensus mechanism in a Proof-of-Stake blockchain. A stake is a fixed amount of funds that are committed to a blockchain by a validator in order to participate in the creation and attestation of the block.

PoW versus PoS

In Proof-of-Work, crypto transactions are verified by mining. In Proof-of-Stake, validators are chosen based on a set of rules based on the “stake” they have in the blockchain. Either way, cryptocurrency is designed to be decentralized and distributed, which means transactions are visible and verified by computers around the world.

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The function of these two mechanisms is to validate transactions. Proof of work helps agree on which block to add by requiring network participants to expend large amounts of computational resources to generate new valid blocks. Proof of Stake, on the other hand, uses less power than PoW but does the same job as it was created as an alternative. However, Proof-of-Stake requires participants to stake cryptocurrency as collateral to add a new block to the digital ledger blockchain.

The mining process in Proof-of-Work consensus is energy-intensive because it requires a lot of electricity and other resources to verify transactions, create new tokens, and add new blocks to the network. Regarding Proof of Stake, Sahicoin CEO and Co-Founder Amit Nayak said, “The PoS mechanism achieves the same thing with less resources and less complexity. Unlike PoW, participants stake a certain amount of crypto and are randomly selected to validate transactions in the PoS system.

BENEFITS OF PoW

Proof of work is a more decentralized way to validate transactions on a blockchain because it requires more computers and network participants to review and approve transactions. For many crypto purists and enthusiasts, the more decentralized the better.

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Other benefits include:

  • It was intended to put an end to attempts at double spending.
  • It is one of the safest consensus mechanisms.
  • PoW-based cryptos have more mining power.
  • It has a better ability to be decentralized.

COUNTER POW

Proof of work requires a significant amount of energy to verify transactions. Since computers in the network have to spend a lot of energy and operate a lot, blockchain is less environmentally friendly than other systems.

Some other disadvantages include,

  • Its operation requires extremely powerful hardware.
  • It is not affordable for all market players.
  • Energy consumption due to extremely high mining participation is off the charts.
  • The majority of mining pools are controlled by single entities.
  • Slower transaction speeds and high cost to validate transactions.
  • He is subject to 51% attacks.

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BENEFITS OF POS

Proof-of-stake offers key advantages over proof-of-work, experts say. Its faster transaction speeds and more efficient power requirements enable more scalable blockchains. Thus, it is easier for them to find adoption among new users.

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On top of that, Proof-of-Stake provides opportunities to earn more crypto. You can lock your coins in a liquidity pool and receive rewards in the form of more coins. This provides more opportunities to earn passive income.

Other benefits include:

  • The sake proof mechanism is relatively immune to 51% attacks.
  • It does not need expensive equipment for processing.
  • Transactions are faster and relatively inexpensive.
  • Less energy-consuming and offers financial opportunities.
  • Ecological

DISADVANTAGES OF POS

The main problem with proof of stake is that it usually requires a huge upfront investment. You must purchase enough native token of that cryptocurrency to qualify as a validator. It usually depends on the size of the network. In theory, people have to be wealthy or earn enough money to buy a stake in the network, which leads to an exclusively wealthy blockchain. As the market value of cryptocurrencies increases, this problem could get worse

Other issues include:

  • It is more difficult to really decentralize the network.
  • Less secure than PoW as it is easy to take over the network as it depends on capital.
  • PoS models have not been implemented on an elaborate blockchain.
  • PoS lacks many PoW benefits like mining rewards etc.
  • Threads like double spends are executable.

CONCLUSION

Proof-of-stake and proof-of-work both have their pros and cons. Each system has its strengths and weaknesses, and which one you think is the best is ultimately up to your perspective. However, experts are of the opinion that proof-of-stake is a better and more efficient way to operate a blockchain network. This is probably the reason why Ethereum is moving from traditional PoW to a PoS consensus mechanism via its Ethereum 2.0 upgrade. “Proof-of-work and proof-of-stake are mechanisms used on these networks to verify transactions,” says Adam Blumberg, CFP, co-founder and president of Interaxis, a company that educates financial advisors about crypto assets. “However, for financial systems, proof-of-stake works best.”

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