Proof of Work vs. Proof of Stake: introduction
Cryptocurrency mining depends on a consensus method for transactions to be validated throughout the chain, without the need for central authority.
Proof of Work (PoW) and Proof of Stake (PoS) are the two most common methods for verifying the authenticity of cryptocurrency transactions. But what are the differences between the two?
What is Proof of Work (PoW)?
Proof of Work is the consensus method created by Satoshi Nakamoto, the creator or creators of Bitcoin. Nakamoto’s goal was to create an algorithm that would allow transactions in Bitcoins to be validated and that would prevent double-spending.
The concept behind PoW already existed, but Satoshi Nakamoto applied it to the cryptocurrency in order to ensure that the validation system was decentralized and maintained mutually by all nodes in the network.
Basically, Proof of Work works as follows:
- The probability of being allowed to mine a block is guaranteed by the miner’s “work”. This “work” is equivalent to the computational power needed to solve a complex numerical equation.
- A reward is given to the first miner who can solve the equation.
- Miners compete to be the first to solve the equation. The PoW method strengthens the community, however it may cause some centralization, as it makes it difficult to individual miners compete with large conglomerates.
- The PoS method has a better cost-benefit ratio, since it does not include rewards and there is no competition. Since PoS does not require a strong computer capacity to solve a complex algorithm, there is also no considerable energy consumption.
- Examples of cryptocurrencies that use PoW: Bitcoin, Litecoin, Etherum (but it plans to migrate to PoS), Monero, ZCash.
What is Proof of Stake (PoS)?
While Proof of Work has certainly revolutionized the way cryptocurrency transactions are validated, it has also brought some problems. The computer and energy capacity needed to solve the equations are the main ones.
Proof of Stake was first mentioned in 2011, in a post on the Bitcointalk forum, with the objective to solve these problems. PoS virtualizes the consensus method — whoever takes the lead is the one who has the greatest assets in cryptocurrencies, and not who has the best computers.
Instead of miners, we have validators, who “lock up” a part of their assets as bet on the blocks they believe will be added to the blockchain. When the block they have bet on is finally added, they receive the transaction fee for the block proportional to the bet.
To sum up, the Proof of Stake works as follows:
- The probability of mining a block is defined by the sum of assets a node in a chain bets (its stake). The more cryptocurrencies are bet, higher get the chances of mining the next block.
- There is no reward. Whoever made the highest bet receives the block transaction fee.
- PoS method has a better cost-benefit ratio since it does not include rewards and there is no competition. PoS is much more efficient when speaking of energy consumption because it does not require computational power to solve the algorithm.
- The user would need to have 51% of all the coins distributed in the market to be able to attack the network.
- Examples of cryptocurrencies that use PoS: Nxt, Neo, Cosmos, Qtum, Reddcoin, Dash (it uses a hybrid of PoW and PoS).
Bonus — Proof of Capacity (PoC)
There is also the lesser-known Proof of Capacity (PoC) method. In this case, the space on the miner’s hard disk is used as proof of capacity.
PoC has a similar method to PoS — but while PoS defines its winners by the bet they place, PoC doest by comparing the space available on their hard disk. As it consumes little energy, it is considered the most ecological option among the three.
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