Proof of Work (PoW) and Proof of Stake (PoS) are both types of consensus mechanisms securing the blockchain network. They are also the key factor used by the biggest cryptocurrencies, such as Bitcoin, Ethereum, and Cardano. There are currently more cryptocurrencies using PoW than PoS, but that could change in the future. In this article, I will guide you through the most important characteristics of both consensus mechanisms. But first, in order to understand PoW and PoS, you need to understand why they are necessary to blockchains.
Blockchain can be understood as a database whose main task is to validate transactions in order to record them in the block. The validation process is done with a consensus mechanism where participants of the network verify and confirm transactions. There are many types of consensus mechanisms, among which are the two most popular, PoW and PoS.
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What is Proof of Work (PoW)?
Proof of Work is a consensus algorithm that relies on miners solving complex mathematical puzzles in order to validate a transaction. When the miner successfully solves the puzzle, a transaction is added to the block and he receives a reward. A great amount of computational power is necessary to solve those puzzles which make PoW a high energy-consuming mechanism. That is why miners’ facilities usually look like giant server storage.
Proof of Work is a very reliable type of validation because one needs to have 51% of all computer processing power in order to trick the network. The most notable cryptocurrency that uses PoW is also the biggest – Bitcoin.
What is Proof of Stake (PoS)?
Proof of Stake is a consensus algorithm in which validators stake their coins in order to validate a transaction. It substitutes computational power with staking power, where staking power is calculated by the number of coins staked. Validators don’t receive block rewards like in PoW, instead, they receive network fees as their reward.
In order to trick the PoS mechanism, one needs to accumulate 51% of that cryptocurrency which is very unlikely to happen. The most famous cryptocurrency using PoS is Cardano. Ethereum will also use PoS when it completes its upgrade to Ethereum 2.0.
Key difference between PoW and PoS
The key difference between the Proof of Work and the Proof of Stake consensus mechanisms is the way they validate transactions. While PoW uses computational power and requires a huge amount of energy, PoS uses staking power and requires validators to lock their coins. They are both validators for the blockchain network but they achieve validation by a different consensus method.
PoW and PoS comparison
| Comparison | Proof of Work | Proof of Stake |
|---|---|---|
| Method | Solving complex mathematical puzzles | Staking coins in the network |
| Entry barrier | High – because of hardware requirements | Low – because only the staked amount is necessary |
| Reward | Block rewards | Network fees |
| Energy consumption | High | Low |
| Security | 51% of computational power necessary to trick the network | 51% stake power necessary to trick the network |
Conclusion
Consensus mechanisms are key to cryptocurrency existence. Giants of the crypto industry started with PoW which proved itself as a reliable method of validation. With the development of industry, new mechanisms arrived which tried to solve the problems of their ancestors. PoS gained a lot of popularity because of low energy consumption and entry barriers. No wonder one of the biggest cryptocurrencies, Ethereum, is moving towards it as well. It seems like PoS is a natural next step of consensus mechanisms evolution.