Proof-of-Work vs. Proof-of-Stake: What’s the difference?

Region: Europe
Sep 15, 2021, 11:00:00 AM Published By Wirex Team

Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the two most popular consensus mechanisms used by blockchain networks.

But what is a consensus mechanism? A blockchain network requires collective agreement between all parties that the information added to it is true. This is known as the consensus. The consensus mechanism, therefore, is the procedure that verifies the correctness of all transactions on the blockchain.

Both PoW and PoS are mechanisms commonly used to validate transactions on the blockchain. The main difference between them is that PoW requires computers to solve complicated equations (aka ‘mining’) to do so, whereas PoS requires owners of a certain crypto to ‘stake’ their coins.

That’s the short answer - now let’s have a look at both in a bit more detail.

What is PoW?

PoW is the original consensus mechanism used by the original cryptocurrency, bitcoin. It works by incentivising people to ‘mine’ blocks of a blockchain in return for rewards. Miners work in competition with each other - the first to successfully mine a block receives the reward, which is usually a portion of the crypto they’re mining, plus transaction fees.

The mining process itself involves solving complicated cryptographic puzzles with high-powered computers.

What are the downsides?

It’s often said that PoW is not particularly eco-friendly. Mining uses a significant amount of power, as is frequently reported by the media.

This isn’t helped by bitcoin and other altcoins’ rising prices, which leads to a greater number of people wanting to mine them, and more energy required as a result. In response to this criticism, people have argued that the traditional banking system consumes just as much, if not more, power than crypto.

Another consideration is the potential for 51% attacks. A 51% attack refers to an attack on a blockchain by a group of miners who control more than 50% of the networks hash rate (computing power). Read more about how they occur and just how susceptible PoW blockchains are to them here.

What about PoS?

Unlike PoW, PoS does not reply on computers to reach a consensus. It does so by incentivising members (known as stakers or validators) to stake a minimum amount of crypto to the network, in the form of the network’s native tokens.

Nodes on the network then lock up these tokens for a certain amount of time using a smart contract. Next, an algorithm randomly selects which nodes will validate each new block - the more tokens you stake and the longer you stake them for, the higher your chances are of getting picked.

PoS validators are rewarded in transaction fees and are often granted voting rights with regard to any changes made on the protocol.

Why choose PoS?

PoS is clearly a more environmentally sustainable option to PoW - it’s not hard to see why so many networks are moving towards it. A 51% attack is also theoretically impossible on a PoS network.

Some argue, however, that PoS networks breed inequality - rewarding those with large stakes held over time could be seen as intentionally making the rich richer.

Can a blockchain be both PoW and PoS?

The Ethereum network is currently transitioning into a PoS blockchain, after launching as a PoW back in 2015. The network is gradually implementing a protocol known as Casper in order to replace miners with validators. The initial stages of Ethereum’s Casper upgrade will involve a hybrid PoW/PoS model, with the PoS system layered on top of the PoW system. You can find out more about Casper, how it works and Ethereum’s future as a PoS blockchain here.

The PoW model clearly leaves a lot to be desired, despite being the original mechanism and the prototype for many subsequent cryptocurrencies. But could the second-largest network migrating to a PoS model spark a trend in the industry? Do you think others will follow suit? Share your thoughts below!