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Your Introduction to Proof of Work vs Proof of Stake

Tali Kon

Explaining the difference between Proof of Work vs Proof of Stake.

By this point, you very well may have an understanding about cryptocurrencies’ relationship with a network of computers. A network all works together to verify transactions and secure the system altogether. A process involved in verifying transactions on blockchain technology known as ‘consensus mechanism’. There are two main consensus mechanisms that public ledgers use to regulate the process of verifying transactions and adding data to the blockchain; proof of work (PoW) and proof of stake (PoS). The distribution of cryptocurrencies operates on either of the two consensus mechanisms.

Lets now understand how the two mechanisms operate and the advantages and disadvantages of using both mechanisms.  

Proof of Work (PoW)

The first mechanism to facilitate direct trading on the blockchain is ‘Proof of Work’ (PoW).

In the PoW protocol, each miner ( a user within the network) ‘competes’ to verify a transaction. What this means is that each node will use its computational energy to solve a complex mathematical problem. This process is called ‘hashing’. The node that solves the mathematical problem first receives some amount of cryptocurrency. The rest of the miners, who were also part of the process to verify the mathematical code, also receive a reward of new cryptocurrency. Mining to validate transactions is a very important process in preventing the double spending problem; the attempt to reuse a coin after its use in another transaction.

The PoW mechanism was first employed by Bitcoin and the consensus is what made it the most secure network ever created. PoW now accounts for 90%of the market capitalization of existing cryptocurrencies.  

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Not only does PoW demand huge amounts of electricity consumption, it struggles to accommodate a large number of transactions. As such, the PoS mechanism was invented to solve these issues.

Proof of Stake (POS)

Whilst the Bitcoin network deals with Bitcoin transactions alone, other networks such as Ethereum, incorporate a wide array of transactions, including smart contracts, NFT sales and other innovations from developers. As such, a more efficient and speedy mechanism was needed to facilitate these types of transactions. The PoS mechanism intended to replace the PoW mechanism , with a protocol that is more environmentally-friendly and efficient.

The PoW protocol requires huge amounts of electricity consumption to produce the suitable hash, whereas with the PoS mechanism, the user ‘chosen’ to verify a transaction is based on ownership of coins. In other words, in PoS ,the more cryptocurrency a user owns, the more likely his node will be the one that will produce the correct hash to verify a transaction and thus receive new cryptocurrency as a reward. The selected node verifies the validity of the transactions within the block that the network then should record.

In the PoS mechanism, for the selection of your node to verify a transaction, you need to stake a certain portion of the blockchain’s cryptocurrency. The higher the amount one stakes, the better chance of the system choosing their node. However, in order to keep the selection process somewhat fair and not just favour those who own the most currency, there are other determining factors in the process of selection. These include randomization and the amount of time taken to stake. 

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Blockchains such as Cardano, ETH2 blockchain and other newer cryptocurrencies, use this PoS system. 

POS vs POW

The PoW protocol is considered a highly secure consensus mechanism; the blockchains that work on this protocol are more difficult to attack. Another advantage of the PoW mechanism is that miners receive rewards from both a portion of a transaction fee and a block reward. Despite these advantages, PoW models demand excessive computing power which results in detrimental environmental impacts and high costs. 

The PoS protocol does not demand the computational power that PoW does and is therefore more environmentally friendly. The blockchains that work on PoS however are usually less secure however and more susceptible to certain attacks. 

Although PoS does not require huge amounts of electricity consumption, a user must own specialized hardware (GPUs). Additionally, energy expenses come out through maintaining internet connections. 

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