Proof of Stake (POS) vs Proof of Work (POW) | NDAX Blog
Decentralization is a defining feature of cryptocurrency networks. But without a central authority to oversee transactions, how does the network prevent people from committing fraud by spending the same money more than once?
That’s where consensus mechanisms come in. They enable the network to agree on the validity of each transaction.
Since agreements are reached through automated, computational processes, consensus mechanisms are referred to as ‘trustless’ systems. They provide assurance and security without the need to trust in the integrity of third parties.
There are two main consensus mechanisms that most cryptocurrencies use to maintain their networks: Proof of Work (PoW) and Proof of Stake (PoS). Below, we’ll explain how they work and what makes each one unique.
What is Proof of Work?
Bitcoin was the first cryptocurrency to adopt the proof of work consensus mechanism. It requires participants in the network to expend computing power (work) to solve mathematical puzzles.
The first one to solve the puzzle gains permission to add new blocks of verified information to the blockchain. Then, they’re rewarded with a certain amount of cryptocurrency. This process is called mining.
Since solving these puzzles is an energy-intensive process, it’s difficult for any single actor to manipulate the network. As the value of a cryptocurrency increases, it incentivizes more miners to join the network and compete for the rewards. The more miners there are on the network, the more computing power it would require to overtake the network. A group of miners would need to control at least 51% of the network’s computing power to succeed.
Proof of work has proven to be incredibly secure. Since its inception, Bitcoin’s network has never been successfully attacked. In fact, it would cost over $5.46 billion in hardware alone to even attempt such a feat.
How are proof of work transactions verified?
Whenever a new transaction is initiated, it gets distributed to the network of computer validators, known as nodes. These nodes hold a shared ledger of the complete transaction history on the blockchain.
This transaction gets grouped with other pending transactions and collectively becomes a block. Miners then compete to solve a mathematical puzzle that requires large amounts of computational power – the process known as proof of work.
Once a miner solves the puzzle, they can add the latest block of new transactions to the blockchain. A new block is mined roughly every ten minutes, and the current mining rewards for validating a new block are 6.25 BTC.
Since hundreds or thousands of nodes are required to verify the same information on the blockchain, it’s almost impossible to force the network to accept incorrect transactions.
Coins that use PoW
Here are some of the top coins with their own blockchains that utilize PoW, ranked by market cap:
· Bitcoin Cash (BCH)
· Ethereum Classic (ETC)
· Monero (XMR)
Ethereum is a notable exception on this list. While it currently operates on a PoW blockchain, it is actively moving towards a PoS blockchain, Ethereum 2.0, which could be launched in late 2021 or early 2022. Since the Ethereum network needs to process anything from smart contracts to DeFi transactions and NFT sales, it struggles to handle the scale of transactions on a PoW network.
Advantages of PoW
Proof of work offers several advantages over other consensus mechanisms. There’s a reason it was chosen to secure Bitcoin, the original cryptocurrency.
· Proof of work is incredibly secure. It requires large amounts of computational power and financial resources to attack the network.
· Miners that mint new blocks are rewarded with network transaction fees and block rewards, which can be substantial.
· PoW networks tend to be more decentralized than PoS.
Disadvantages of PoW
Proof of work networks also exhibits certain weaknesses that have led to the development of other consensus mechanisms like proof of stake. Some of these disadvantages are:
· High energy consumption is required to mine new blocks, leading to environmental concerns and considerable expense.
· Expensive, powerful computing hardware is required to participate in the network.
· As a cryptocurrency nears its mining cap, it could de-incentivize miners.· PoW networks can face challenges in scaling and processing large amounts of transactions.
What is Proof of Stake?
Proof of stake was developed in response to proof of work’s shortcomings, namely scalability, speed, and network efficiency.
Instead of the entire network competing to solve the same puzzle, like in PoW systems, participants on proof of stake blockchains contribute their cryptocurrency. The more tokens a participant has, the greater mining power they have.
Participating in proof of stake systems is easier than ever. Now, users don’t need any technical knowledge to earn staking rewards. Instead, they can simply join staking pools. These groups pool cryptocurrency holdings together and distribute the earnings to the group members.
How are proof of stake transactions verified?
Validators on a proof of stake blockchain must lock in their cryptocurrency to have a chance of verifying new transactions and adding new blocks to the blockchain.
Participants who have the largest stake and have the longest involvement have a greater chance of adding the next block. Once a winner has been chosen, they verify a block of transactions confirmed by the rest of the network participants.
However, rewards are not only given to the winners of this selection process. All participants in the network are entitled to receive a certain amount of rewards for verifying network transactions. These staking rewards are directly proportional to the amount of cryptocurrency a validator has locked into the network.
If validators go offline, confirm incorrect transactions, or attempt to attack the network, they are penalized and can lose their entire stake.
Coins that use PoS
Here are some of the top coins with their own blockchains that utilize PoS, ranked by market cap:
Advantages of PoS
Proof of stake was developed in response to some of the weaknesses of the proof of work mechanism. The following are some of its main advantages:
· PoS is much more energy-efficient than PoW.
· Users that stake cryptocurrency on the network can earn significant rewards without expending much computing power.
· PoS has a lower barrier to entry than PoW, as it doesn’t require expensive hardware to participate.
· PoS systems are generally faster than PoW systems and can handle a larger volume of transactions.
Disadvantages of PoS
Proof of stake is not without several disadvantages. Some of these include:
· PoS can be susceptible to centralization and monopolies over time, as larger stakeholders gain more control over the network.
· Proof of stake networks are generally less secure than proof of work networks and may require less cost and computing power to attack.
· PoS is a newer system and not as time-tested as PoW.
Key differences between PoW and PoS
Both Proof of Work and Proof of Stake consensus mechanisms offer various solutions to achieve trust and security in the network. To summarize, here are some of their fundamental differences.