Though many people in India and other parts of the world are getting increasingly interested in cryptocurrencies, they may not have knowledge about the technical aspect of it. It is crucial for people to have the right kind of information about a cryptocurrency before putting their money in it. Cryptocurrencies make use of blockchain technology, and it has to follow certain protocols and regulations. These protocols or rules create insurance from any interferences from the outside world (hackers and cybercrimes) and are known as Consensus Mechanism or Consensus Algorithm. You may have heard and even invested in cryptocurrencies like Bitcoins and Ethereum, but do you know about their consensus mechanism? These blockchain platforms or simply cryptocurrencies use consensus mechanisms, Proof of Work (PoW) and Proof of Stake (PoS). Proof of Work and Proof of Stake are the two major consensus mechanisms that cryptos use for their regulation activities such as verifying new transactions, adding them to the blockchain, and creating new tokens. In order to understand how each blockchain platform or cryptocurrencies functions, it is significant to know about PoW, PoS, and the difference between them.
What is Proof of Work?
Proof of Work is considered as blockchain’s original consensus algorithm which is used by the first-ever cryptocurrency Bitcoin. The concept of Proof of Work is closely related to mining, and it requires a huge amount of processing power. It acts as a system that can work with a suitable degree of effort to prevent the platform from getting corrupted or disrupted with miscellaneous activities. Proof of Work is a decentralized consensus algorithm and is secured and verified by virtual miners including members who can solve mathematical problems and puzzles to prevent the platform from getting jammed or hacked by unauthorized persons. It is widely used in cryptocurrency mining, where miners solve the puzzles and equations, and then a new block is created, which is then further sent to the ledger. It is used in cryptocurrencies where miners are needed to mine the new blocks and validation of transactions is required. The miners are rewarded for their mining skills in the form of bitcoin and other cryptocurrencies.
Proof of Work has emerged as an enormously powerful and advantageous mechanism and has proven itself as a secure decentralized blockchain. With the rise in the value of cryptocurrency, more miners join the network, thereby increasing its security and power. Though PoW is a valuable mechanism in the world of cryptocurrencies, it faces certain limitations. Proof of Work is an energy-intensive mechanism, and it may face trouble scaling and accommodating the vast number of transactions. Even when it can accommodate such vast transactions, it requires a massive amount of energy for this scaling. The Proof of Stake is considered a good alternative to this mechanism.
What is Proof of Stake?
The blockchain platforms such as Ethereum, Altcoins, etc. actively work on the Proof of Stake consensus mechanism. Proof of Stake was introduced to overcome the limitations of Proof of Work, which is mostly the excessive usage of energy. Proof of Stake depends upon the currency power rather than the computational power, reducing the energy consumption and thus making it an eco-friendly consensus algorithm. In fact, Proof of Stake is sometimes considered to be more secure than the Proof of Work mechanism. In such a mechanism, the miners with the maximum number of tokens can only approve the transaction i.e., miners with more coins will have more power. The Proof of Stake system uses a staking function through which the network participants are selected to add the latest block of transactions to the blockchain and earn crypto in exchange. Under this consensus algorithm, the validators with the maximum tokens can mine the next block. Then these validators approve and validate the transactions in order to add them to the next block on the blockchain distributed ledger. Every participating validator gets a reward in the form of the native cryptocurrency, which is distributed in the proportion of each validator’s stake.
The job of a validator in the Proof of Stake mechanism is that of high responsibility and requires a high degree of technical knowledge. Also, the minimum crypto coins that a validator needs to stake is often high and they also face the risk of losing their stake through a process known as slashing, an event when a validator’s node goes offline or if they mistakenly validate a “bad” block of transactions. You can still manage to participate in staking by joining a staking pool run by someone else through crypto platforms such as Coinbase and thereby earn rewards for crypto that would otherwise be sitting around.
Proof of Work Vs. Proof of Stake
We need to know the difference between the two consensus algorithms in order to understand them in a better way. Some of the prominent parameters of difference between the two are:
|Basis||Proof of Work||Proof Of Stake|
|Proof of Work has high energy and electricity requirements as it needs the miners to spend considerable energy on duplicative procedures.||Proof of Stake allows networks to operate with significantly lower resource consumption.|
|Proof of Work requires the miners to crack the hash functions to create or validate the new block. This offers high security to the users of networks using Proof of Work.||Proof of Stake is also known to create secure networks that protect the crypto, however, sometimes security may remain untested in them.|
|Proof of Work rewards the first miner who solves the equation in the form of bitcoins.||Proof of Stake may or may not be rewarded in form of blocks or coins. The validators in PoS may take the transaction fees instead.|
|In the case of Proof of Work, the penalty for miners giving invalid blocks or details is the sunk cost of computing power, energy, and time.||In Proof of Stake, when a validator accepts a bad block, a portion of their staked funds is “slashed” as a penalty.|
Tools and Equipment Requirements
|Proof of Work requires heavy equipment such as computers with GPU and high efficiency to perform mining operations, and hard drives.||Proof of Stake does not necessarily require these heavy tools and equipment.|
|Proof of work is the older of the two, used by Bitcoin, Ethereum 1.0, and many others.||Proof of Stake is relatively newer, and it powers Ethereum 2.0, Cardano, Tezos, and other (generally newer) cryptocurrencies.|