Every cryptocurrency project has a consensus mechanism, which is the way by which the network validates transactions. The two major consensus mechanisms in the crypto space are proof-of-work (PoW) and proof-of-stake (PoS).
What is the difference between the two though? In this guide, we discuss each of the consensus mechanisms and highlight the major differences between them.
What is PoW?
As earlier stated, PoW is the consensus mechanism used on the Bitcoin network as well as any other cryptocurrency that requires mining. Such a network uses miners to validate or confirm transactions.
Miners use sophisticated computers to solve difficult puzzles and confirm transaction blocks to be added to the Bitcoin blockchain for example. This requires the use of a lot of electricity, something that Bitcoin critics have highlighted for years as a reason to ban the asset.
The main idea behind PoW is to stop double spending, a situation in which one person can send two transactions using the same crypto balance. It presents a way to verify peer-to-peer transactions in a trustless manner without the need for an intermediary.
The system rewards miners who beat others to verify transaction blocks with block rewards. This is a combination of newly generated cryptocurrencies and transaction fees, and is the only way that new units of the cryptocurrency come into circulation.
Block rewards continue to decrease at a steady rate, usually by 50% roughly every four years in the case of Bitcoin. It means the supply of the asset is designed to reduce over time, leading to more scarcity and a higher price eventually.
What is PoS?
PoS on the other hand is a consensus mechanism first introduced in 2011 as an alternative to PoW. Because PoW has a scalability limitation that makes it process only a small number of transactions per time, the concept of PoS was brought to solve the problem.
Both mechanisms work towards achieving consensus on the blockchain, but PoW uses a different approach. This method doesn’t involve miners or the use of high tech equipment to mine. Rather, they use validators, participants who use their crypto holdings to serve as stakeholders.
To become a validator on the Ethereum blockchain for instance, you’ll need at least 32 ETH tokens. By staking such an amount of ETH, you can participate in validating transaction blocks. The idea is that with such a significant investment on the network, you wouldn’t take any decisions to compromise its security.
Like miners, validators also receive rewards for their roles in securing the network. They get rewarded with more ETH for example, from the transaction fees from blocks they validate. The PoS protocol randomly chooses who validates the next block, but you’ll increase your chances with more ETH.
What are the Key Differences?
There are notable differences between PoW and PoS. One of them is the way consensus is achieved and blocks are verified. While PoW uses sophisticated computers to solve puzzles, PoS simply uses validators who stake their crypto holdings and rely on them to validate transactions.
Secondly, Miners have to run a race to outcompete other miners and beat them at validating blocks. However in PoS, the protocol decides who mines the next block, mostly based on how much they stake. Also, PoW consumes more energy than PoS because no sophisticated equipment is used.
Which is Better?
Both PoW and PoS have their strengths and weaknesses. For example, PoW takes a lot of energy, so it serves as a deterrent to those who intend to game the system. This is the secret behind Bitcoin’s robust security. However, it is considerably slower, and the energy cost is a concern.
PoS on the other hand enhances scalability but compromises on decentralization, as only few individuals are chosen to validate transactions.