To learn and understand the difference between proof of stake and proof of work protocols, we need to understand a few more things. At the heart of any cryptocurrency, there is a blockchain recording all transactions. A blockchain is a distributed ledger - a database maintained by the members of the public. So, how do we ensure that someone does not record false information on the blockchain? How do we prevent malicious parties from fabricating information on a blockchain for their benefit? And above all, how to ensure all information recorded on a blockchain is correct and reflects true information? So, we need something like a voting mechanism to ensure that a block contains only correct information.
- 1. What is Consensus and Consensus Mechanism in Blockchains?
- 2. What is Proof of Work (PoW)?
- 3. What is Proof of Stake (PoS)?
- 4. Comparing PoW and PoS - Which One is Better?
- 5. Cryptocurrencies Running on Proof of Work (PoW)
- 6. Cryptocurrencies Running on Proof of Stake (PoS)
- 7. Other Consensus Mechanisms
- 8. Key Takeaways
- 9. Difference Between Proof of Stake and Proof of Work Protocols - FAQ
1. What is Consensus and Consensus Mechanism in Blockchains?
When we work in a group, we need to ensure that everyone (or at least a majority) agrees on a decision. So, when you and your friends want to choose a restaurant for a dine-out, you all must first agree on whether you are going to try Thai food or settle for Italian. So, in a decentralized database like a blockchain, we need to agree on the transactions and values recorded on the blocks.
Since the network participants in a blockchain can be in millions spread across countries, they cannot just sit and decide before completing blocks. There needs to be a mathematical solution for this. A consensus mechanism is a cryptographic solution to ensure consistency among different participants and validators of a blockchain.
So, a consensus mechanism is basically an algorithmic voting system that ensures a blockchain is accurate and secure. And most importantly, a consensus mechanism ensures that no single participant can alter the entire blockchain. The consensus mechanism is what makes it feasible for a decentralized database to function properly without any central authority. There are two primary types of consensus mechanisms - Proof of Work (PoW) and Proof of Stake (PoS).
2. What is Proof of Work (PoW)?
As you know, a blockchain is a decentralized database maintained and validated by millions of network participants. But why would someone put time and effort to validate transactions on a blockchain?
Clearly, we need some kind of incentives for the participants to deploy their time and computing resources in keeping a blockchain running. So, the participants (who are also called miners in a PoW system) receive a certain amount of cryptocurrencies each time they validate transactions and help complete a block.
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Since everyone would like to earn more of those cryptocurrencies, they compete with each other to win a chance to complete a block. This competition takes place in terms of solving mathematical puzzles through trial and error. As the blockchain grows, these puzzles become increasingly difficult to solve and require more and more computing power. The participant winning the race to find the missing piece of the mathematical puzzle gets a chance to complete the next block and earn incentives. This is the underlying mechanism of the proof of work mechanism.
One needs to essentially give ‘proof’ that they have produced some ‘work’ (solving mathematical puzzles) to get a chance to complete blocks and keep the blockchain up. In proof of work, new cryptos are released in circulation each time a block gets created. So, the process of creating new cryptos in PoW is also called ‘mining’ and the participants are called miners. Crypto mining (Especially Bitcoin mining) has become a huge industry in itself because of the incentive of earning newly minted cryptos.
While Proof of Work (PoW) is the most common and established consensus mechanism, it faces several criticisms. PoW requires extensive computing power, which consumes a huge amount of electricity. For example, the Bitcoin network is estimated to consume over 127 terawatt-hours (TWh) a year. This is higher than the annual power consumption of Argentina, a country of 45 million people!
In addition, crypto mining leads to a huge amount of emissions. According to the latest estimates, Bitcoin mining has released around 200 million tonnes of carbon dioxide into the atmosphere since its inception.
Moreover, PoW suffers from various security issues. It is susceptible to different forms of malicious attacks. For example, if someone gets access to more than 51% of the computing power of the entire network, it can get control of the entire blockchain. In technical terms, it’s called a 51% attack.
Even though the concept of PoW was introduced in the 1990s, it was made famous by Bitcoin’s enigmatic founder Satoshi Nakamoto. This is the reason this consensus mechanism is called Nakamoto Consensus. As an alternative to Proof of Work (PoW), there is a relatively new consensus mechanism called proof of stake (PoS) which is much less energy intensive. To learn more about the subject, we have published a concise Bitcoin guide which you can read for free.
3. What is Proof of Stake (PoS)?
In a proof of stake (PoS) system, network participants (Also called validators) do not need to deploy humorous computing power to validate blocks. Instead, they need to put a certain amount of cryptocurrencies as a ‘stake’ in the blockchain to win a chance to complete blocks. The probability of getting an opportunity to validate the next block depends on the amount of staked cryptos and some other factors. So, the PoS mechanism is based on staking, which means keeping cryptos as security deposits with the blockchain to be able to validate transactions.
The staking system ensures that only genuine participants are allowed to validate blocks. As an incentive, validators get transaction fees for validating blocks. Also, if the completed blocks are invalid, the participants lose the staked cryptos. So, PoS has an in-built system for ensuring the safety and security of the blockchain.
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The PoS mechanism gets rid of the energy-intensive crypto mining, which requires gigantic computing power and electricity. For example, in 2022 the second most valued cryptocurrency Ethereum (ETH) shifted from PoW to PoS. It lowered Ethereum’s energy consumption by a whopping 99.99%.
Lately, PoS lowers the chance of a 51% attack, as one needs to own more than 50% of the cryptocurrencies of the blockchain. This can be highly expensive. You can learn more on the subject of crypto trading with our "Cryptocurrency Investing Explained" guide.
4. Comparing PoW and PoS - Which One is Better?
The key difference to remember between the two is that proof of stake is based on crypto staking, while proof of work is based on crypto mining. Let’s look at some of the most important distinctions between PoW and PoS:
|Proof of Work (PoW)||Proof of Stake (PoS)|
|Mechanism||Involves solving mathematical puzzles to win a chance to validate blocks.||Involves the staking of cryptocurrencies to win a chance to validate transactions.|
|Requirements||Require specialized hardware, advanced processors, and a huge amount of electricity.||Validators need a certain amount of cryptos for staking.|
|Terminologies||The participants are called miners.||The participants are called validators.|
|Energy efficiency||It is highly energy intensive and requires huge amounts of electricity.||Extremely energy efficient.|
|Security speed and scalability||PoW is more secure but relatively slower i.e. less scalable.||PoS is faster and more scalable. However, it is less secure than PoW.|
|Legacy||Well-established and the oldest consensus mechanism||Relatively new and requires more testing|
|Decentralization||PoW is more centralized because of the high entry requirements (for example the need for huge computing power)||PoS is considered more decentralized.|
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5. Cryptocurrencies Running on Proof of Work (PoW)
Most cryptocurrencies use the PoW mechanism. Here are the most prominent cryptos using the PoW system:
- Bitcoin (BTC)
- Dogecoin (DOGE)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
- Monero (XMR)
- Zcash (ZEC)
- Dash (DASH)
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6. Cryptocurrencies Running on Proof of Stake (PoS)
Proof of stake has become immensely popular in the past few years due to its notably lower use of energy and higher potential for scalability. These are some of the leading cryptos using the PoS mechanism:
- Ethereum (ETH)
- BNB (BNB)
- Cardano (ADA)
- Polkadot (DOT)
- Toncoin (TON)
- Avalanche (AVAX)
- Cosmos (ATOM)
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7. Other Consensus Mechanisms
A consensus mechanism's primary goal is to keep the blockchain running and make it more secure. Currently, PoW and PoS are the most prominent consensus mechanisms. However, newer consensus mechanisms are being developed by blockchain developers to deal with the shortcomings of the existing ones. Here are some of the other consists mechanisms in addition to the top-2:
- Proof of Activity (PoA): It combines both mining and staking.
- Proof of Authority (PoA): It is based on the reputation of the participants.
- Proof of Capacity (PoC): It is based on the available hard drive space with a network participant.
- Proof of History (PoH): This consensus mechanism is based on built-in historical records.
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8. Key Takeaways
Knowing what is the difference between proof of stake and proof of work protocols is essential to understand the principles of how the blockchain works, which, in turn, positively influences our knowledge about cryptocurrencies. Here, you can read all the key takeaways regarding PoW and PoS:
- Proof of Work (PoW) and Proof of Stake (PoS) are two primary consensus mechanisms used in validating transactions in a blockchain.
- Proof of Work (PoW) involves solving mathematical puzzles to win a chance to validate the information in a block. It is energy intensive and requires humungous computing power.
- Proof of Stake (PoS) works based on a taking mechanism. In this system, participants need to stake their cryptos with the blockchain to win a chance to validate blocks and earn transaction fees.
- PoS is much more energy efficient and scalable than PoW. However, PoW is commonly considered more secure than PoS.
- In addition to PoS and PoW, there are several lesser-known consensus mechanisms like PoA and PoC.
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9. Difference Between Proof of Stake and Proof of Work Protocols - FAQ
9.1 ❓ What is Proof of Work (PoW)?
Proof of work (PoW) is the process of validating transactions on a blockchain to confirm transactions, close a block, and open a new one.
9.2 ❓ What is Proof of Stake (PoS)?
Proof of stake (PoS) is a cryptocurrency consensus mechanism for transactions processing and creating new blocks in a blockchain.
9.3 ❓ What is the main difference between Proof of Stake and Proof of Work?
The key difference between proof of work and proof of stake protocols is that proof of stake (PoS) relies on crypto staking, while proof of work relies (PoW) relies on crypto mining.