Those who are interested in the world of cryptocurrencies must, at least in part, have an idea of how virtual coins work. Often in the industry you come across the terms Proof of Work (PoW) and Proof of Stake (PoS), particularly difficult to understand for those who are now entering the crypto world.
Both PoW and PoS require the use of computer algorithms responsible for the great success of cryptocurrencies like Ethereum and Bitcoin. These algorithms are used to arrive at what is defined in the world of cryptocurrencies as “distributed consensus.”
Let’s take a look at the differences between Proof of Stake and Proof of Work and what’s behind it.
What is Proof Of Work (PoW)
The Proof of Work, or PoW, is an algorithm that is used by different cryptocurrencies – such as Bitcoin, Ethereum, Litecoin – to reach a decentralized agreement between different nodes in the process of adding a blockchain-specific block.
Hashcash (SHA-256) is the Proof of Work function used by Bitcoin. The cryptocurrency obliges the miners to solve extremely complex and computationally difficult mathematical problems in order to add blocks to the blockchain. This function produces a very specific type of data that is used to verify that a considerable amount of work has been performed – hence the term Proof of Work.
We can look at the Proof of Work as a long attempt that eventually produces a single piece of data that fits within the Bitcoin protocol. This process takes a lot of time and energy, but the miners are widely rewarded.
What is Proof Of Stake (PoS)
Proof of Stake is an alternative method, a way through which nodes reach a consensus. It was proposed for the first time by a user of the Bitcointalk forum in 2012 because the PoW required too much electricity and energy.
Many studies today compare the cost of electricity for the management and operation of a Proof of Work network like the Bitcoin to the power supply of millions of homes in the United States. The Proof of Stake, on the other hand, uses much less energy and is therefore much greener and more user-friendly than Proof of Work.
In the Proof of Stake, the number of digital currency tokens held by each user is an important factor within the system. The larger the stake, the amount of tokens owned by a user, the greater the chances that you are not violating the system.
The blocks of the Proof of Stake, unlike the blocks of the Proof of Work, are not extracted, but coined. Participants with significant participation in Proof of Stake systems are selected on a random basis to coin the blocks and add them to the blockchain.
The selection process takes effect after the system analyzed several factors to ensure that individuals with a larger share are selected.
Proof of Stake is generally applied to pre-mined cryptocurrencies, to allow the user to access them through participation. This means that the overall offer of Proof of Stake cryptocurrencies is fixed from the beginning and that there is no bonus for creating blocks, as is the case in the Proof of Work. The only incentive for miners in this system is represented by the transaction fees associated with the specific block coined.
PoW against PoS: the differences
Both the Proof of Stake and the Proof of work have their strengths and weaknesses. There are a number of alternatives to these two methods, computer scientists and specialists work every day to find new and efficient solutions to reach consensus on the blockchain.
Proof of Stake can be considered the most eco-friendly and most economical consensus method, but there is still work to do to make it even better.