Proof of Work vs. Proof of Stake: understanding the key differences
- Proof of Stake (PoS) and Proof of Work (PoW) are two consensus algorithms in blockchain networks that validate transactions and secure the network.
- While both algorithms serve the same purpose, their approaches, advantages, and disadvantages differ.
- But which, if either, is better than the other?
You may know about cryptocurrencies, but do you understand one of the fundamental frameworks that make up the blockchain behind them—proof of work (PoW) and proof of stake (PoS)? Bitcoin is based on one, and newer cryptos such as Ethereum are based on the other, but which is which?
If you are unsure of the answer, feel free to read on to find out once and for all. If you plan on dipping your toe into crypto, then this short guide should, we hope, prove invaluable.
What is proof of stake?
Proof of stake (PoS) is a "consensus" algorithm or mechanism that verifies transactions and keeps blockchain networks safe. This is usually defined as a way to get everyone on a decentralized computer network to agree, trust each other, and feel safe.
It differs from the Proof of Work (PoW) algorithm in that validators are chosen to create blocks based on how much cryptocurrency they are willing to "stake" or lock up as collateral.
Validators in a PoS system are chosen based on their stake in the network. The more cryptocurrency a validator has, the more likely it will be selected to create the next block. When a validator is picked, a new block is generated and sent to the network to be checked.
So, regarding Ethereum 2.0, a candidate validator must currently stake 32 ETH.
Other validators then confirm the block's validity; if it is valid, it is added to the blockchain. Validators who want to join validation pools can also do so through "liquid staking," which uses an ERC-20 token to represent their ETH.
In a PoS system, validators have a reason, to be honest, and follow network rules. They could lose their stake if they do something wrong or try to cheat the system. PoW uses more energy than PoS because it needs more computing power to validate transactions and secure the network. One reason for developing PoS systems was to reduce the carbon footprint of blockchain.
When compared to PoW, PoS uses less energy because it doesn't need as much computing power. Overall, PoS is an alternative consensus algorithm that, compared to PoW, provides a way to secure blockchain networks that uses less energy and can be scaled up.
Several cryptocurrencies use the PoS consensus algorithm to validate transactions and create new blocks. Some of the most well-known cryptocurrencies that use PoS include, but are not limited to:-
- Ethereum 2.0 (ETH)
- Cardano (ADA)
- Polkadot (DOT)
- Solana (SOL)
- Binance Coin (BNB)
- Cosmos (ATOM)
- Tezos (XTZ)
- Algorand (ALGO)
- VeChain (VET)
- Tron (TRX)
- EOS (EOS)
What is proof of work?
Proof of Work (PoW) is an algorithm for reaching consensus that checks transactions and keeps blockchain networks safe. It is the original consensus algorithm that Bitcoin and many other cryptocurrencies rely on.
In a PoW system, miners use computer power to validate transactions and make new blocks by undertaking complex mathematical calculations. The first miner to solve the math problem gets a reward from a newly created cryptocurrency.
Because PoW requires a lot of computing power, it is hard for hackers to get into the network. This makes the web safer. But miners use a lot of energy because they must do many calculations to validate transactions and create new blocks. According to the US government, the total global electricity usage for crypto-assets is between 120 and 240 billion kilowatt-hours annually. This likely exceeds many countries' unlimited annual electricity usage, such as Argentina or Australia.
The difficulty of the math puzzle is changed regularly to keep the rate of new blocks from changing. As more miners join the network and compete for block rewards, the "puzzle" gets more challenging.
PoW is a well-known consensus algorithm to secure blockchain networks. But because they use a lot of energy, other consensus algorithms, like proof of stake, have been developed that are a more energy-efficient way to keep blockchain networks safe.
Among the most prominent cryptocurrencies that employ PoW currently include, but are not limited to:-
- Bitcoin (BTC)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
- Monero (XMR)
- Dash (DASH)
- Dogecoin (DOGE)
- Zcash (ZEC)
- Bitcoin SV (BSV)
- Decred (DCR)
But it's important to know that some cryptocurrencies plan to switch to a proof-of-stake consensus algorithm soon.
So which, PoW or PoS, is better?
Is proof of stake better than proof of work?
Like most competing technologies or systems, PoS and PoW both have benefits and drawbacks. But, to figure out which is better, it is worth taking a look at the advantages and disadvantages of each.
So, let's start by looking at the benefits of PoS:-
- PoS consumes less energy than PoW because it does not require miners to solve complex mathematical puzzles with computational power.
- Compared to PoW, PoS can handle more transactions per second, making it more suitable for large-scale applications.
- PoS incentivizes validators to act honestly and follow network rules, as they risk losing their stake if they work maliciously or attempt to cheat the system.
But, it is not "all gravy," as they say:-
- PoS is more prone to centralization because validators with more enormous stakes have a higher chance of being chosen to create new blocks, giving them more power over the network.
- PoS networks can be vulnerable to attacks if a single validator or a group of validators obtains a large percentage of the network's total stake.
So, what about PoW? Some of the most important benefits include the following:-
- PoW is more decentralized than PoS because any user with computational power can join the network as a miner.
- PoW has been successfully used in Bitcoin for over a decade, making it a proven and battle-tested consensus algorithm.
- Because of the high computational power required to solve mathematical puzzles and validate transactions, PoW is exceptionally secure.
But it also has its unique downsides:-
- PoW requires significant energy to solve mathematical puzzles and validate transactions, resulting in high energy consumption and environmental concerns.
- PoW's scalability is limited due to the computational power required to validate transactions and create new blocks.
So, the needs of the blockchain network currently determine whether PoS or PoW is better. PoS is more energy-efficient and scalable but has security and centralization risks. PoW, on the other hand, has been tried and tested and is very secure, but it uses more energy and can't be expanded as much.
Is Cardano proof of stake or work?
Cardano is a blockchain platform that also uses PoS. It was built from the ground up with the Ouroboros PoS consensus algorithm, created by a team of cryptography and computer science experts led by Professor Aggelos Kiayias.
Transactions are validated, and new blocks are created in a PoS system like Cardano by network participants known as validators or slot leaders. Validators are chosen based on their stake or ownership in the network's cryptocurrency, ADA, which they must "stake" or lock up as collateral to participate in the consensus process. This gives validators a reason to be honest, and follow the rules of the network since they could lose their stake if they try to cheat the system.
Ouroboros PoS is intended to be highly secure, energy-efficient, and scalable. It allows for a high number of transactions and the creation of multiple blockchains that can be used to build new Cardano apps and services.
Cardano is a PoS blockchain platform. It checks transactions and adds new blocks to its blockchain with the Ouroboros PoS consensus algorithm.
Are there any other alternatives to PoW and Pos?
Besides the ones I've already discussed, a few cryptocurrencies use different consensus algorithms.
Some of the most common alternatives to PoW and PoS include, but are not limited to:-
- Delegated Proof of Stake (DPoS): Several cryptocurrencies, including EOS (EOS), Tron (TRX), and BitShares, use this consensus algorithm (BTS). In DPoS, block validators are selected through a voting process among token holders, and it is their responsibility to validate transactions and create new blocks.
- Proof of Authority (PoA) is a consensus algorithm used by some private and consortium blockchains, such as the Azure Blockchain Service from Microsoft. In Proof of Authority, network administrators pre-approve block validators based on their reputation and identity instead of their ability to solve complex mathematical problems.
- PoB is a consensus algorithm used by a handful of cryptocurrencies, including Slimcoin (SLM). In Proof-of-Burn, users "burn" (destroy) their coins to prove their loyalty to the network; in exchange, they can validate transactions and create new blocks.
- PoC is a consensus algorithm some cryptocurrencies use, such as Burstcoin (BURST). In Proof-of-Concept, block validators demonstrate that they have allocated a certain amount of storage space on their devices to mine new blocks.
These are a few examples of the various consensus algorithms utilized by cryptocurrencies. Notably, each algorithm has pros and cons, and the choice of algorithm can significantly affect the security, scalability, and decentralization of a blockchain network.
And that's your lot for today.
The needs and goals of a blockchain network ultimately determine the choice between PoS and PoW. PoW has shown to be a reliable way to secure the Bitcoin network, but PoS has advantages in terms of energy efficiency, scalability, and decentralization.
PoS is also better for the environment because it doesn't need as much computing power as PoW. But PoS has some problems and risks, like the possibility of becoming too centralized and security problems.
As a result, it is critical to carefully consider the tradeoffs between PoS and PoW when deciding which algorithm to implement in a blockchain network or on which to buy, hold, and sell crypto coins.