Blockchain technology is the foundation upon which cryptocurrency is built. This means the blockchain is designed to validate cryptocurrency transactions. However, cryptocurrency and blockchain technology depends on consensus mechanisms to ensure transparency and security so that they can operate and be trusted by users. These consensus mechanisms are how the computers (nodes) that manage the blockchain and store the records of all transactions reliably agree.
Consensus mechanisms like Proof-of-Work and Proof-of-Stake let a distributed network of users decide which new block of transactions should be added to a cryptocurrency's blockchain. As a result, they are protocols that enable blockchains to function securely; they safeguard blockchains by allowing and validating only legitimate users to add new transactions. However, the endpoint of the two mechanisms is the same. But, the primary distinction between proof-of-work and proof-of-stake is how they determine who can add transactions to the chain.
When the first cryptocurrency, Bitcoin, was introduced, it was based on blockchain technology, which employs a consensus mechanism that involves solving complex mathematical problems to validate transactions, ultimately securing and maintaining the blockchain and thereby earning cryptocurrency as a reward.
For context, the network participant, often referred to as miners, agree on which block to add by requiring them to expend significant computational resources and energy to generate new valid blocks. As a result, the miners are compensated for the time, energy, and resources they spent validating transactions. Proof-of-Work, the first consensus algorithm for cryptocurrencies, was born out of this.
What is Proof-of-Work?
Proof-of-Work (PoW) is validating and confirming cryptocurrency transactions on the blockchain. In a PoW system, computers compete with one another to solve challenging mathematical computations based on network users' ability to demonstrate that a computational task has been completed. A node of computing power is used to solve this challenging mathematical computation. Once the equation is solved, the transaction is validated, and a new block is added to the chain.
How does PoW Operate?
The blockchain is a system composed of a series of blocks arranged in sequential sequence based on a transaction order. Blockchain is a type of distributed ledger technology in which participants must validate transactions before adding a new block to the series of blocks. However, when a new block is added to the chain, it adheres to the previous block and updates the ledger with the information obtained.
PoW protocol decides who gets to add a new block to the ledger with new entries through a competitive race between the participants (called miners). As a result, miners are rewarded with cryptocurrency for the work done; the reward is given for mining the next transaction block. Miners are required to solve incredibly complex mathematical problems to mine the next block and receive their reward. However, miners use powerful computers that operate continuously to solve these complex computations. In addition, PoW is designed to stop users from printing additional coins they didn't earn or from double-spending. The currency would become essentially worthless if users could use their coins repeatedly.
On the other hand, the PoW mechanism is synonymous with cryptocurrency mining because the process requires the blockchain to be maintained by validating and confirming transactions in exchange for rewards and mining new blocks. However, while PoW allows cryptocurrencies to use its protocol to process transactions peer-to-peer in a safe and decentralized manner, cryptocurrency mining has significant limitations due to high electricity consumption. Therefore, one of the drawbacks of this system is that it necessitates the use of numerous machines that consume vast amounts of electricity to solve complex problems, with the first miner as the exclusive beneficiary of the energy used. To solve this drawback, the Proof-of-Stake emerged.
What is Proof-of-Stake?
Proof-of-Stake (PoS) was developed as an alternative to Proof-of-Work (PoW) and was intended to address some of PoW's inadequacies. The principle behind PoS is that network participants can validate a transaction by securing their cryptocurrency holdings into a staking protocol that gives them the authority to approve the succeeding block of transactions at predetermined intervals and get rewards for their stakes. This means PoS is based on the existence of a verifiable stake in the ecosystem rather than doing actual work.
How does PoS Operate?
Like the PoW blockchain, the PoS blockchain comprises several blocks arranged in a particular order based on the order of transactions. Before a transaction is added to the chain, it is validated by network users. The new block always complies with the requirements of the previous blocks, and the ledger is updated with the latest data.
PoS network participants are referred to as validators. They earn the right to validate the next block of transactions added to the chain by staking their cryptocurrency for a specific duration. As a result, the algorithm chooses validators at random, but validators who have staked the most cryptocurrency for the longest duration have a higher chance of producing the next block.
For example, validator A stakes $100, validator B stakes $250, validator C stakes $125 coins, and validator D stakes $150. Validator B would be given priority and stand the highest chance of producing and validating the next block. As a result of the stake, Validator B will receive rewards for locking their cryptocurrency into the protocol. This means the amount of cryptocurrency they have staked determines their chances of being chosen to produce the next block. Validators are rewarded for both creating blocks and validating the addition of other blocks.
PoW Vs. PoS: The Difference
Proof-of-Work
Proof-of-Stake
The chances of mining a block are measured by the amount of computational work performed by the miner.
The size of a stake a person (validator) holds determines the likelihood of validating a new block (i.e., the quantity of their crypto asset is a factor).
Miners must compete to use their computer processing power to solve complex mathematical computations to add each block to the chain.
This is no form of competition. Instead, validators are selected by the PoS protocol based on the amount of their stake and the duration.
Consumes high energy with heavy processing power, making it less energy-efficient and expensive.
Consumes less energy than PoW while performing the same function and achieving the same results.
The reward is distributed to the first miner who solves the computational problem of each block.
Instead of receiving a block reward, the validator is compensated with network fees.
Specialized hardware is used to achieve maximum processing power, such as Application-specific Integration Circuits (ASIC) and Graphics Processing Units (GPUs).
The operation can be performed with a standard server-grade device unit.
PoW Vs. PoS: Which is better?
Both mechanisms have advantages and disadvantages. Regardless, when it comes to security and decentralization, PoW takes the edge. While, in PoS, there is a chance of centralization if validation authority is consistently given to the most prominent stakeholders. This means a validator with the highest stake dictates the protocol. However, this defeats the core purpose of cryptocurrency and blockchain technology.
Also, to create the next block of PoW protocol, a significant amount of time and energy is required. As a result, transactions can be excruciatingly slow compared to proof of stake mechanisms. So, transaction fees are significantly lower on PoS blockchains.
Consequently, there isn't a specific consensus mechanism superior to the others on all levels. It is necessary to know that each has advantages and disadvantages. There wouldn't be Proof-of-Stake without Proof-of-Work. And like blockchain technology, this argument will probably change over time.
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