Proof of work and proof of stake are two blockchain consensus models that are used to ensure the validity of transactions in cryptocurrency trading. In this article, we’ll be taking a look at Prood of Work vs Proof of stake- what they are and their differences.
What is Proof of Work?
According to Investopedia, Proof of work (PoW) describes a system that requires a not-insignificant but feasible amount of effort in order to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial of service attacks.
Proof of work is used widely in cryptocurrency mining, for validating transactions and mining new tokens.
Due to proof of work, Bitcoin and other cryptocurrency transactions can be processed peer-to-peer in a secure manner without the need for a trusted third party.
An example of a cryptocurrency network that uses PoW is Bitcoin. It uses a PoW algorithm based on the SHA-256 hashing function in order to validate and confirm transactions as well as to issue new bitcoins into circulation.
What is Proof of Stake?
According to Investopedia, Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchain—so the consensus mechanism secures the blockchain.
Proof-of-stake (POS) was created as an alternative to Proof-of-work, the original consensus mechanism used to validate a blockchain and add new blocks.
While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms require validators to simply hold and stake tokens.
Proof-of-stake reduces the amount of computational work needed to verify blocks and transactions that keep the blockchain, and therefore a cryptocurrency, secure.
The biggest proof-of-stake blockchains by market capitalization in 2021 were Cardano, Avalanche, Polkadot and Solana. Other prominent PoS platforms include Tron, EOS, Algorand, and Tezos. There have been repeated proposals for Ethereum to switch from a PoW to PoS mechanism. (Source: Wikipedia)
Proof of Work vs Proof of Stake: Differences
We’ll be taking a look at the differences between PoW and POS by considering two factors.
1. Electricity Demand:
Cryptocurrency experts and critics frequently point to the sector’s noteworthy electricity use and outflows. That energy demand is basically from the confirmation of work agreement show which has ended up a significant client of power universally. For example, Bitcoin (BTC-USD) has an energy cost per transaction of 830kWh or 130TWh per year and Ethereum (ETH-USD) has a per-transaction energy cost of 50kWh or 26TWh per year. (Sources: Medium.com & ccaf.io)
In contrast, a proof of stake cryptocurrency like Tezos (XTZ-USD) has an energy cost per transaction of just 30mWh or 60MWh per year. The additional energy use of proof of work methods make it difficult for miners following those protocols to be as profitable as with other models since the electricity and computing costs often means their expenses greatly reduce their profit margins.
2. Risk of Attack:
Proof of work prevents attacks by making miners expend resources to compete against each other to more quickly solve cryptographic equations to confirm each blockchain block.
Proof of stake, on the other hand, only allows miners to validate blocks if they have provided a “stake” or security deposit, this motivates attackers to confirm legitimate transactions and avoid forking the blockchain since they would lose their stake. For that reason, proof of stake can be an effective way to prevent cryptocurrency attacks since there is no benefit to the attackers to disrupt the blockchain to steal or double-spend coins.
Although proof of work is the most popular blockchain consensus model, other consensus models like proof of stake might be more efficient since they can increase security, reduce energy use, and allow networks to more effectively scale.