Proof of work or Proof of stake, The two basic consensus processes used by cryptocurrencies to validate new transactions, add them to the blockchain, and produce new tokens are “proof of work” and “proof of stake.”
Without a central authority like Visa or PayPal in the middle, decentralised cryptocurrency networks must ensure that no money is spent twice. To do this, networks use a “consensus mechanism,” which is a technique that enables all computers in a crypto network to agree on which transactions are valid.
Most cryptocurrencies nowadays employ one of two basic consensus techniques. Proof of work is the oldest of the two and is utilised by Bitcoin, Ethereum 1.0, and many other cryptocurrencies. Proof of stake is a modern consensus method that underpins Ethereum 2.0, Cardano, Tezos, and other (usually younger) cryptocurrencies. To understand proof of stake, first understand proof of labour, thus we’ve combined the two in this presentation.
What is proof of work?
Bitcoin pioneered the use of proof of work as a crypto consensus technique. Mining and proof of work are concepts that are closely connected. The network needs a large amount of computing power, thus the term “proof of work.” Proof-of-work blockchains are protected and validated by virtual miners all around the globe competing to solve a math challenge first. The winner gets to update the blockchain with the most recent confirmed transactions and is paid with a fixed amount of cryptocurrency by the network.
Proof of work offers many tremendous benefits, particularly for a basic but very valued cryptocurrency like Bitcoin (learn more about how Bitcoin works). It’s a tried-and-true method of keeping a secure decentralised blockchain. As a cryptocurrency’s value rises, more miners are encouraged to join the network, enhancing its power and security. Because of the amount of processing power required, it is unfeasible for any person or organisation to interfere with the blockchain of a valued cryptocurrency.
On the other hand, it is an energy-intensive operation that may struggle to scale to meet the massive number of transactions that smart-contract compatible blockchains such as Ethereum may create. As a result, solutions have emerged, the most prominent of which is known as proof of stake.
What is proof of stake?
Ethereum’s creators knew from the start that proof of work would have scalability constraints that would have to be addressed — and, indeed, as Ethereum-powered decentralised finance (or DeFi) protocols have grown in popularity, the blockchain has struggled to keep up, causing fees to rise.
While the Bitcoin blockchain largely simply needs to handle incoming and outgoing bitcoin transactions, Ethereum’s network also has to process DeFi transactions, stablecoin smart contracts, NFT minting and sales, and whatever future innovations developers come up with.
Their answer was to create a totally new ETH2 blockchain, which started rolling out in December 2020 and is expected to be completed in 2022. Proof of stake, a speedier and less resource-intensive consensus method, will be used in the updated version of Ethereum. Proof-of-stake consensus algorithms are used by cryptocurrencies like as Cardano, Tezos, and Atmos, with the purpose of maximising speed and efficiency while minimising costs.
Staking in a proof of stake system is similar to mining in a proof of work system in that it is the method by which a network member is chosen to add the most recent batch of transactions to the blockchain and earn some coin in return.
The specifics vary each project, but in general, proof of stake blockchains use a network of “validators” who contribute — or “stake” — their own cryptocurrency in return for the opportunity to verify new transactions, update the blockchain, and receive a reward.
- The network chooses a winner based on how much cryptocurrency each validator has in the pool and how long they’ve kept it there – essentially rewarding the most invested members.
- After the winner has confirmed the most recent block of transactions, additional validators may testify to its accuracy. The blockchain is updated when a certain amount of attestations are received.
- All validators who participate earn a reward in the native cryptocurrency, which is dispersed by the network in proportion to their stake.
Becoming a validator is a significant duty that requires a reasonably high degree of technical understanding. The minimum amount of crypto that validators must stake is often rather large (for ETH2, for example, it is 32 ETH), and validators might lose part of their stake via a process known as slashing if their node goes down or if they verify a “bad” block of transactions.
Even if that seems like too much responsibility, you can still participate in staking by joining a staking pool managed by someone else — and get incentives for bitcoin that would otherwise remain idle. This is known as delegating, and tools provided by Coinbase exchanges can make it easy and smooth.
What are some differences between proof of work and proof of stake?
One significant distinction between the two consensus systems is their use of energy. Proof-of-stake blockchains enable networks to run with much reduced resource usage since miners are not need to spend power on duplicative procedures (competing to solve the same problem).
Both consensus processes have economic ramifications that punish network interruptions while also discouraging malevolent actors. The penalty for miners providing erroneous information, or blocks, in proof of work is the sunk cost of processing power, energy, and time. The staked crypto money of the validators serve as an economic incentive to operate in the best interests of the network in proof of stake. If a validator accepts a faulty block, they will have a percentage of their staked money “slashed” as a punishment. The amount by which a validator may be reduced is determined by the network.