Proof of Work and Proof of Stake are two different types of consensus mechanisms that are used to verify transactions on a blockchain network, without the need for a third party.
Find out the key differences between Proof of Work and Proof of Stake in the guide that follows.
Proof of Work
The Proof of Work (PoW) mechanism was coined by Markus Jakobsson and Ari Juels in 1999 but was first created with the inception of Satoshi Nakamoto’s Bitcoin.
It uses an advanced form of mathematics known as cryptography, which is composed of complex equations that only very powerful computers can solve.
Once each equation is solved (it’s important to note that each one is different), the network verifies the transaction and can add it to the blockchain. A reward (e.g. Bitcoin) is given to the first device that solves the equation.
Unfortunately, there are some major drawbacks to this model.
Firstly, it requires extremely large amounts of energy to operate the computing power needed, which, in turn, is quite unsustainable and bad for the environment.
Secondly, there are thousands of devices attempting PoW, however only one receives the mining reward. This means that people with more power and higher quantities of hardware devices have a greater chance of winning the reward.
The PoW model is also very limited with the number of transactions it can process at the same time. The Bitcoin blockchain takes about 10 minutes to confirm each transaction.
Many other cryptocurrencies use the same Proof of Work model, such as Ethereum, Dogecoin, Litecoin and Monero (to name a few).
Proof of Stake
Due to the drawbacks of the Proof of Work model, the Proof of Stake (PoS) mechanism was created in 2012 by two developers, Scott Nadal and Sunny King.
The Proof of Stake model uses a different process, where blockchains employ a network of validators who stake cryptocurrency for the chance to validate a new transaction and earn a reward.
All participating validators receive a reward in cryptocurrency which is proportional to the amount they have staked.
A major advantage of PoS is that it requires significantly less energy consumption and is thus much better for the environment. Founders Nadal and King argued that the PoW model required the equivalent of $150K in daily electricity costs. Since then, the figure has continued to increase into the millions.
It also reduces reliance on powerful hardware as it allocates resources in a way where miners are not competing to solve the same complex equations.
Ethereum is currently in the process of transitioning to a Proof of Stake model, which looks to be completed by 2022. Due to a significant increase in traffic on the Ethereum network in recent years, largely due to DeFi projects and NFTs, the network transaction fees (gas feeds) have skyrocketed.
Using the Proof of Stake will reduce fee problems significantly. This will also, in turn, allow a far greater number of transactions to be processed at the same time.
Current examples of Proof of Stake blockchains include Polkadot, Cardano, EOSIO and DASH (to name a few).
Where the Proof of Work model is unsustainable and relatively slow, the Proof of Stake model is an energy-efficient and more cost-competitive peer-to-peer currency.
