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In a blockchain system, nodes need to agree on the state of a single data in the database to create the next block in a blockchain. This process is called a consensus mechanism, a fault-tolerant system that helps the network verify a single data value, add it to the blockchain and give the network a unified state among its multi-agent system.
Across the cryptocurrency industry, two consensus mechanisms are widely used: Proof of Work and Proof of Stake. They differ in their methods of creating a consensus. While Proof of Work relies on mining, Proof of Stake requires staking to create an agreement within the network.
Get to know about these two unique protocols that run the blockchain. Find out what makes them different here at Bitcasino.
The first consensus mechanism we will introduce is the proof-of-work system. This mechanism adds new blocks to the blockchain through mining. It is where crypto miners compete to win the right to verify the new block. Every time a miner is selected as the verifier of transaction data, they will receive a reward for their participation. Sounds simple enough? It gets much deeper than that.
Let us guide you through the process of proof of work cryptocurrency or PoW below:
As a decentralised network, the blockchain doesn't have any centralised authority to verify the accuracy of every new transaction added to the blockchain. What it relies on instead is the distributed network of participants called miners. These miners are responsible for validating the crypto transactions through mining.
However, not every computer node or miner can be selected to verify the block. Only those who solve the complex transaction algorithm can receive the reward.
How it works
The blockchain consists of blocks arranged chronologically based on the transaction period. The first block in a proof of work crypto blockchain is called the genesis block, which is hard coded in the software since it does not refer to any other blocks before it. Meanwhile, the subsequent blocks following the genesis will always refer back to the prior blocks before it so that they may contain an updated ledger copy.
The mining process
The mining process is a competitive problem-solving race to receive the right to encode the cryptography of the next block. PoW algorithms often select the miner who gets to amend the ledger based on how fast they solve the complex puzzle of a mathematical equation.
Miners need to update these ledgers to keep track of all the crypto transactions a user of the blockchain performs and organise them into successive blocks to prevent double-spending. As a reward for computing the complex math problem and unlocking the right to verify the next block, a miner will earn newly mined crypto coins.
This entire process requires huge computational energy resources, which is why many deem cryptocurrency bad for the environment.
Due to its huge energy consumption and use of specialised equipment, Proof of Work was not a sustainable consensus mechanism to process digital currency verification. Thus, a new consensus mechanism was proposed by Ethereum on the Bitcointalk forum in 2011. From there, the Proof of Stake was born.
Proof of Stake cryptocurrency or PoS supposedly addresses all the inadequacies and inefficiencies of the proof of work protocol. To create a sustainable system for crypto, Proof of Stake deviates from performing tangible work and instead turns to verifiable stakes in the blockchain ecosystem. This results in less required computational resources required to run the blockchain network.
Simply put, the validator nodes that verify the transaction had to invest a particular amount of cryptocurrency native to the blockchain before they could be selected to validate the next block.
Just like the Proof of Work, Proof of Stake also has a genesis block that is hardcoded into its decentralised program. The subsequent blocks after the genesis always refer to the block before them to update the ledger with new data.
Despite working almost similarly to Proof of Work, Proof of Stake draws the line when it comes to how it selects a validator node. In PoS, miners no longer had to solve complex problems to earn the right to add blocks. Instead, they stake a huge amount of the blockchain's native tokens to earn the right to be selected as the next block validator.
This process showcases several advantages over Proof of Work since it reduces energy use and doesn't require top-of-the-line technology to create new blocks.
A blockchain network's PoS system can only be as effective as its members. This means that the more validators there are in the PoS blockchain, the stronger its immunity against centralisation. This is possible since validators and users of PoS exercise a form of governance and vote for or against proposed changes in a blockchain.
Now that you are more or less familiar with both proof of stake and proof of work identify which of these two consensus mechanisms is better. To highlight the difference between the two protocols, here's a crash course of what we've discussed above:
Validators and miners
Some key differences might point to the validators and miners, which are the nodes both protocols use to verify the block. Validators are more associated with PoS, while miners are the validators of PoW blockchains.
Method of selecting validator
Aside from the general term for the nodes, these two mechanisms also differ in selecting the next block validator. In Proof of Stake, validators can stake a certain amount of native coins for a specified period. If they get selected, they have the honour of verifying the block and receiving a return of investment or crypto rewards. The Proof of Stake protocol encourages the validators to vote on which block will be appended on the blockchain.
Meanwhile, Proof of Work requires the miners to solve a complex cryptographic code before they can be chosen as the block verifier. This mechanism values speed in the mining process, so it requires high energy levels and the most advanced tools before a miner is selected.
Here's a table detailing the difference between proof of work and proof of stake in their processes, incentivisation, scalability, reliability and more:
Each consensus mechanism has its set of pros and cons. Despite different platforms promoting Proof of Stake as a better protocol, you can't deny that there are some areas in that PoW does better than PoS. Check out the advantages and disadvantages of both mechanisms below:
From the information we've shared, there is an obvious disparity regarding the energy consumption of both mechanisms, but we will reiterate it anyway. Proof of Work uses more energy and resources than Proof of Stake, which is one of their key differences.
Throughout the years, critics' biggest complaint about crypto is the massive amount of energy required to run it. According to the University of Cambridge, Bitcoin's proof of work mechanism uses 0.39% of the world's annual electricity. This means it costs more to mine Bitcoin than to run a country like Belgium or Finland. With Proof of Stake, this is no longer an issue.
The Ethereum Foundation shared that their proof of stake consensus mechanism is designed to lessen the energy consumption of mining by up to 99.95%. Aside from the significantly less energy used, PoS also creates a gateway for faster transactions, and these are just the top two benefits of PoS. There is more to discover as you go on the list.
Risk of attacks
There are risks in every transaction regardless of the consensus mechanism your blockchain uses, but there are protocols that promise significantly less dangerous transactions for you.
In Proof of Work, miners are required to compete against each other to solve certain complex equations. Once a miner becomes the verifier of a certain block, the system will rely on them to follow the rules of the blockchain and remain trustworthy.
Do you see the problem already? You see, if a group of miners manage to gain 50% control, they can collectively prevent transactions from being confirmed in the blockchain and can even spend coins twice in a fraudulent act called double-spending. Although there had never been a case like this, the fact that it is largely plausible doesn't comfort crypto users.
Meanwhile, proof of stake validates blocks by requiring security deposits from validators. Those 'stakes' prevents validators from being dishonest in the process lest they lose their stake in the system. This leaves the attackers virtually no benefit in disrupting the blockchain since they can't make a fraudulent move without putting their investment at risk.
Both consensus mechanisms have their sets of pros and cons that can help you decide which protocol works best for your transaction. There is no right answer regarding which is better since both systems work differently and might satisfy different needs.
If you're looking for faster and cheaper transactions, your best bet is to find a blockchain network that uses the proof of stake mechanism. However, if you are keen on security and decentralisation, you will fare better with proof of work. Whichever of these protocols you think is better ultimately depends on your point of view and preference among the best cryptocurrencies.
Proof of Work provides a more decentralised way of validating crypto transactions since it requires more miners and computers in the network to review and approve a transaction before it can be added to the blockchain. The logic is that the more crypto enthusiast there is in a system, the more decentralised it will be.
Proof of stake has the advantage of coming after proof of work, which means it is already built upon the other mechanism lacking. One thing that makes this protocol significantly better is the efficient use of energy, which requires the blockchain to be more scalable. Additionally, since it doesn't require miners to solve complex problems, less time is needed to process transactions.
Both consensus mechanisms are secured in their own right.
Some blockchains and coins powered by the Proof of Stake consensus mechanism are Ethereum Merge, Cardano and other newer cryptocurrencies. Meanwhile, Proof of Work is mostly used by beginner-friendly cryptocurrencies like Bitcoin and the first version of Ethereum.
Yes, since it doesn't require highly advanced and fast computers to solve complex puzzles when adding new blocks.
PoW is best used if your focus is on decentralising your transaction process. If you are looking for a more scalable system with cheaper and faster transactions, then you should use PoS and look for supported cryptocurrencies. Unfortunately, crypto giants like Bitcoin are mostly supported by Proof of Work; thus, this consensus mechanism is still largely used around the globe.
Words by: Ana Gundran
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