Proof of Stake (POS) vs Proof of Work (POW) | Ndax Blog

That’s where consensus mechanisms come in. They enable the network to agree on the validity of each transaction.

Because agreements are reached through protocol rules and verification, consensus mechanisms are often described as “trust-minimised” 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.

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 can be highly secure in well-established networks. Bitcoin has not experienced a successful 51% attack on its main chain, but no system is immune to attacks and security depends on decentralisation and economic incentives.
 

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 Bitcoin block is mined roughly every 10 minutes on average, and the current block subsidy is 3.125 BTC (since the April 2024 halving), plus transaction fees.

Because many nodes independently verify blocks under consensus rules, it is difficult to force the network to accept invalid transactions without controlling significant consensus power.
 

Here are examples of coins with their own blockchains that use proof of work:

• Bitcoin (BTC)
• Bitcoin Cash (BCH)
• Dogecoin (DOGE)
• Ethereum Classic (ETC)
• Litecoin (LTC)

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 can be highly secure in well-established networks because attacking the network generally requires significant computational power and financial resources. However, no consensus mechanism is risk-free, and security depends on factors such as network participation, decentralization, miner incentives, and market conditions.
• Miners that add new blocks may receive transaction fees and block rewards under the network’s rules. These rewards can vary depending on the asset price, transaction fees, mining difficulty, energy costs, and other operating expenses.
• Decentralization varies by network design and participation. Both PoW and PoS networks can be decentralized or concentrated depending on how mining or staking power is distributed.
   

Proof of work networks also exhibit 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.
   

Proof of stake was developed in response to proof of work’s shortcomings, namely scalability, speed, and network efficiency. Instead of miners competing to solve puzzles, proof of stake uses validators who stake tokens under protocol rules. Validator selection is typically stake-weighted, but the mechanics vary by network.

Some users participate through staking services or pooled staking options, but requirements and risks vary by network and provider. These groups pool cryptocurrency holdings together and distribute the earnings to the group members.
 

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.

Validator selection is generally influenced by stake, and some protocols also incorporate additional rules (such as validator sets, delegation, or rotation). 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. Rewards are generally paid to validators (and, where applicable, delegators) based on protocol rules, and are not guaranteed. 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.
 

Here are some of the top coins with their own blockchains that utilize PoS, ranked by market cap:

• Algorand (ALGO)
• Cardano (ADA)
• Celo (CELO)
• Ethereum (ETH)
• Polkadot (DOT)
• Solana (SOL)
• Tezos (XTZ)
   

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 who stake cryptocurrency may earn staking rewards, but reward rates vary and are not guaranteed.
• PoS has a lower barrier to entry than PoW, as it doesn’t require expensive hardware to participate.
• Some PoS networks can support faster block times or different scaling designs than PoW networks, but throughput depends on the specific protocol and network implementation.
   

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 and proof of work use different security models. Security depends on decentralisation, economic incentives, and protocol design rather than a simple “more or less secure” ranking.
• PoS is newer than PoW and has a shorter operating history across major public blockchain networks.