Introduction
Proof of Work (PoW) and Proof of Stake (PoS) are the most popular consensus algorithms. Major crypto assets use PoW and PoS to protect their network.
PoW is the mechanism employed by Bitcoin to verify transactions and ensure the security of the network. In addition to other features, PoW also helps to prevent double-spend. The blockchain is safeguarded by miners, who expend computational resources to compete for the privilege of confirming new blocks and updating the blockchain. A miner who is successful in this endeavor will be rewarded in Bitcoin (BTC) by the network. From April 2024 onwards, a miner can receive a block reward amounting to 3.125 BTC, including transaction fees, when they successfully mine a Bitcoin block.
The main difference between PoW and PoS is the way in which participants are rewarded for validating a block. PoW suffers from scalability problems and energy consumption, while PoS addresses these issues in a better way.
In PoS, block creators are called “validators”. They do not need to use high-end hardware to participate in the validation of a block. They simply need to stake their native crypto on the blockchain. The network selects a validator based on the number of coins that are staked, and the validator is rewarded a portion of the transaction fee from the block it validates. The higher the number of coins, the greater the chance of being selected as the validator.
In order to guarantee the integrity of transactions on a blockchain, these networks employ various consensus mechanisms. The oldest of these is PoW was developed by Satoshi Nakamoto and is widely regarded as one of the most secure solutions. PoS was developed later but is now used in the majority of altcoin projects. In addition to Bitcoin, PoW is also used in the following major cryptos: Ethereum (ETH), Litecoin (LTC), Solana (SOL), and Cardano (ADA).
PoW - Definition and Working Methodology
PoW is the consensus algorithm used by the Bitcoin network, as well as by many other cryptos, to avoid double-spending. It was first proposed by the creator of Bitcoin, Satoshi Nakamoto, in the 2008 Bitcoin whitepaper.
At its core, PoW is the mechanism by which the Bitcoin blockchain establishes distributed consensus. PoW is used to verify transactions between two parties in a non-reliable manner, eliminating the need for intermediaries.
On a PoW network, such as Bitcoin’s, transactions are validated by miners. Miners are participants who use a large number of resources to maintain the network’s security and integrity. Among other things, miners generate and verify blocks of transaction data. However, in order to participate in the next block’s validation, miners must use specialized mining hardware that solves complex mathematical problems.
The first miner to successfully solve these math problems wins the right to include their block on the blockchain and receives what we refer to as a “block reward”. A block reward consists of newly generated crypto and transaction fees. A block reward depends on the network. For instance, on the Bitcoin blockchain, a miner can make 3.125 BTC plus fees from each block reward after the Bitcoin halving in 2024. The number of new Bitcoin per block is halved every 210, 000 blocks (roughly every 4 years) owing to the halving mechanism.
Also Read: Use cases and advantages of PoW
PoS – Definition and Working Methodology
PoS is a consensus algorithm introduced in 2011, as an alternative to PoW. The goal of PoS is to overcome the limitations that PoW networks face in terms of scalability. Today, PoS is the second most popular algorithm used by cryptos.
Both PoW and PoS have the same purpose of achieving consensus on the blockchain. However, PoS differs from PoW in the way it determines who validates the block of transactions. On PoS blockchains, there are no miners. Instead, validators rely on the value of their crypto holdings instead of competing with powerful computers for block validation rights
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In order to validate a block on the blockchain, participants must lock a predetermined number of coins in a particular smart contract. This process is referred to as staking. The PoS protocol assigns a validator to validate the following block. This selection may be random or based on the holdings of the validator (stake). The validator may receive transaction fees associated with the block they validate as remuneration. Generally, the greater the number of coins locked up, the greater the likelihood of being selected.
Differences between PoW and PoS
Both are consensus mechanisms that guarantee the security of a blockchain network. However, there are some key distinctions between them. The primary distinction is the validation of new transactions by PoW and PoS.
PoWPoSMiner/ValidatorThe higher the computational power, the higher the probability of mining a block.The greater the number of coins deposited, the more probable it is that a new block will be verified.Mining/Validation processMiners compete to solve complex mathematical puzzles using their computational resources.In most cases, the algorithm randomly selects the winner based on the number of staked coins.Mining equipment Professional mining hardware, such as ASIC, CPU, and GPUAny computers or mobile devices with an internet connectionReward distributionThe block reward is awarded to the individual who mines the block first.Validators may be entitled to remuneration for the transaction fees levied on the block they have validated.Network securityThe bigger the hash size, the safer the network.Staking is a way to keep your crypto safe on the blockchain by locking it up and making sure it is secure.
Is PoS better than PoW?
Some proponents of PoS claim that it has advantages over PoW in terms of scalability, transaction throughput, etc. They also claim that proof of stake coins are more environmentally friendly than PoW coins. On the other hand, it is claimed that PoS is a newer technology that has yet to demonstrate its network security potential. PoW networks require a lot of resources (miner hardware, electricity, etc.) to operate, which makes them more vulnerable to attacks. This is especially true of Bitcoin, which is the largest PoW blockchain.
Final Thoughts
Both PoW and PoS have their respective roles in the crypto world, and it is difficult to determine definitively which consensus protocol works best. While PoW has been criticized for producing high carbon emissions during the mining process, it has proven to be a reliable algorithm for safeguarding blockchain networks. However, as Ethereum transitions from PoW to PoS, PoS may become the preferred system for new projects in the near future.
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Disclaimer: Any financial and crypto market information shared should not be considered investment advice. It is for informational purposes only. Conduct your own research before making investment decisions. Crypto trading is unregulated and highly risky. There may be no regulatory recourse for any loss of such transactions.
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