When it comes to cryptocurrency, the very important network of computers that is used to secure blockchain software from potential hackers and regulate coin supply is at the heart of what blockchain really is. This system is known as the “consensus mechanism.”
The two most commonly used types of consensus mechanisms are known as Proof of Work (or POW) and Proof of Stake (POS). Both of these mechanisms are used to regulate processes involved in user transactions for the purpose of verifying them and adding them to the blockchain’s public ledger. Essentially, they exist to monitor and verify blockchain changes for cryptocurrencies like Bitcoin and Ethereum without the need for a centralized entity.
But what exactly are the differences between these two types of mechanisms? Why do they matter? Understanding the differences between proof of stake and proof of work can help cryptocurrency owners evaluate their potential portfolio contributions.
Proof of stake is a type of modification of the proof of work mechanism. Proof of stake was implemented in the early 2010s to resolve the dependency the mechanism had on energy consumption for the purpose of verifying blockchain ordering, as this mechanism would be very difficult to manage and rough on the environment.
Instead of relying on computational racing to create the right hash, proof of stake protocols aim to determine accuracy and validity in the blockchain simply by determining coin supply ownership. The protocol uses a number of factors to direct the proof of stake algorithm. The algorithm is directed to randomly choose a node (or anyone who owns a coin) to propose the subsequent block in the blockchain. When a node is selected, it gains the role of verifying how valid a transaction is within a block. The node will then sign it and propose the specific block back to the network to validate.
Proof of work is a relatively old mechanism that came about in the nineties. Initially, this technology was used to reduce spam emails. The creator of Bitcoin applied the technology for the benefit of the blockchain via Bitcoin’s white paper.
In a blockchain that uses proof of work, the first block is coded into the software and named the “genesis” or “0” block. This block doesn’t reference any previous block because it is the very first one. All of the following blocks that are added to the blockchain will refer to the block before them, each of which will contain a copy of the complete ledger.
In order to create new blocks, miners that work on a proof of work network will need to compete against one another to solve mathematical equations via hashing. These equations are difficult to solve, but a proof of work network will be able to verify the right solution.
With a proof of work protocol, computational power and cryptography are used together to create a general consensus among miners to ensure how valid transactions are in the blockchain.
It’s worth noting that proof of stake is just a more modern version of proof of work, with some key differences. Proof of stake mechanisms require less energy consumption when compared to proof of work.
In general, the proof of stake model is considered a superior model to use in modern-day blockchain technology. However, there are some issues ad disadvantages to consider. Some miners have concerns over how easily proof of stake can help the already wealthy become wealthier, as individuals with more coins can stake them and earn even more coins. Regardless, this is virtually no different from the proof of work model, which makes it possible for already wealthy miners to purchase hundreds of thousands of ASIC devices.
Still, proof of stake allows individuals to verify different transactions on more than one chain, which proof of work does not allow. This could potentially be an issue because hackers could use proof of stack to launch double-spend attacks.
With those disadvantages in mind, it still might be better to opt for a proof of stake blockchain model. Proof of stake does not cost forgers any amount of money to start mining on different chains, essentially making it possible for miners to not risk any of their wealth. With a proof of work system, miners have to pay quite a bit for power in order to solve the very complicated mathematical puzzles needed to process blocks on a network. Not only is this expensive for generating digital assets, but it could have adverse effects on the environment.
The concept of proof of stake is still being explored, as the mechanism is relatively new. There might be downsides that we have not even discovered in the cryptocurrency world. Still, it’s worth exploring further as an alternative to the energy and time-heavy proof of work mechanism.