Both Proof-of-Work and Proof-of-Stake are referred to as “consensus mechanisms.” What are they, exactly? To comprehend this, you must first understand how blockchains function. Blockchains are networks that are decentralized. As a result, instead of a centralized authority, multiple people (or stakeholders) in the network are in charge of validating transactions. This mechanism is known as consensus.
Consensus mechanisms ensure that all nodes (blockchain devices that keep the blockchain running) are in sync and agree on which transactions are legitimate and should be added to the network. For a blockchain to work properly, consensus mechanisms are key.
PoW and PoS are two blockchain consensus methods that are used in a wide range of blockchain technologies. Proof-of-Work (PoW) is a decentralized consensus method that requires network users to spend time-solving a random mathematical puzzle to prevent anyone from manipulating the system. And, according to the Proof-of-Stake (PoS) principle, a person can mine or validate block transactions based on the number of coins they own. This implies that the more coins a miner has, the greater mining power they have.
How does Proof of Stake work?
Validators, or unique entities under proof-of-stake, are in charge of picking the blockchain’s future blocks. While participating in the proof-of-stake process, validators tie up some of their tokens to not utilize it. They are rewarded for participating in this process, just like miners in proof-of-work.
They don’t have to mine blocks; all they have to do is produce blocks when chosen (by the beacon chain, which proposes new blocks algorithmically) and validate suggested blocks when they’re not. Validators are rewarded for attesting to a new block, which means they accept it as accurate and meet the rules, so they win a block.
Proof-of-Stake vs. Proof-of-Work
- Miners are the participants in proof-of-work. If they have greater processing capacity powered by energy, they are more likely to contribute new blocks to the blockchain. Miners with more money — ether in the case of Ethereum — are more likely to win additional blocks in proof-of-stake. To put it another way, proof-of-stake is based on “proof” of how much “stake” a person has.
- While some feel PoW is better for cryptocurrencies, others say PoS is better for logistics, big data, artificial intelligence, and other mathematical fields.
- The first miner to solve the challenge gets rewarded for their efforts in Proof-of-Work. In Proof-of-Stake, however, there is no reward for creating a block. Therefore the block maker is compensated with a transaction fee.
Proof-of-Stake (POS) was developed to replace the initial consensus method in Blockchain technology, Proof-of-Work (POW). You might be wondering why.
The proof-of-stake system has several advantages over the proof-of-work approach
- Improved energy efficiency — mining blocks don’t use a lot of energy.
- Reduced entry barriers and hardware requirements — creating new blocks doesn’t require cutting-edge technology.
- More nodes in the network — proof-of-stake should lead to more nodes in the network.
- Support for shard chains has been improved, an important step in the Ethereum network’s scalability.
- It is easier to run a node if you stake it. It doesn’t necessitate large investments in hardware or energy, and you can join staking pools if you don’t have enough ETH to stake.
- The centralization concerns are mitigated with PoS consensus since rewards are determined by the number of owned assets and validators chosen at random.
- It prohibits 51 percent attacks — Unscrupulous characters conducting a 51 percent attack would have to stake at least 51 percent of the entire amount of bitcoin in circulation using a PoS consensus mechanism.
- Staking enables safe sharding. Shard chains enable Ethereum to produce several blocks at once, allowing for faster transaction processing. In a proof-of-work system, sharding the network would reduce the power required to compromise a network section.
The discussion over proof-of-stake vs. proof-of-work has mostly remained technical. Cardano is a noteworthy pioneer in proof-of-stake, although the most important initiatives have remained proof-of-work. However, Ethereum’s intentions to switch from proof-of-work to proof-of-stake have brought this issue to the forefront. Ethereum’s incursion began in earnest in 2020, when the proof-of-stake Beacon Chain was created. Buterin that proof-of-stake offers a solution to Bitcoin’s [environmental concerns] since it requires significantly fewer resources to maintain. Buterin has long argued that Ethereum should be based on the POS paradigm.
His comments on the shift come when the cryptocurrency community is discussing the environmental cost of mining coins and other cryptocurrencies.
According to Digiconomist, Ethereum miners now utilize 44.49 TWh per year, or 5.13 gigawatt, continuously. Based on the cautious calculations above, PoS is 2000x more energy-efficient, implying a decrease of at least 99.95 percent in overall energy usage.
The Proof of Stake mechanism is changing the character of blockchain technology, making it more appealing and usable for businesses and organizations. Many organizations consider using an immutable and decentralized data input system because it provides a secure means to keep the information accurate. Having a blockchain that achieves this gets considerably easier with PoS.