Heard people talking about Proof of Work and Proof of Stake but have no idea what it is? In this blog we will simply define and explain it.
A Simple Explanation Of Proof Of Work And Proof Of Stake
Proof of Work (PoW) and Proof of Stake (PoS) are the two different kinds of consensus mechanisms used by cryptocurrencies to validate new transactions and add them to the blockchain. What are consensus mechanisms and what does it all mean? Let’s explain further.
What Is Proof Of Work And Proof Of Stake?
Blockchain builds trust by being a decentralized platform that relies on the approval of a majority of its participants, or “nodes”, before approving a new transaction.When a new record or transaction is made on the blockchain, it has to be first validated to verify its authenticity. This prevents fraudulent activity via unauthorized or improper transactions. The method of validating those transactions is called a “consensus mechanism”. The initial type of consensus mechanism was Proof of Work. Cryptocurrencies are verified by a process called “mining” where virtual miners around the world are invited to solve a complex mathematical puzzle. The first to verify the transaction is rewarded with a specified amount of cryptocurrency. An alternative verification method is Proof of Stake. This is where a network participant is selected to validate a transaction, based on the “stake” or amount of cryptocurrency they have in the pool and how long they have had it there. It essentially rewards those who are most heavily invested. Other validators then verify the results and when consensus is reached, they are all rewarded with cryptocurrency.
Compare The Pair: Proof Of Work Vs Proof Of Stake
Proof of Work was the first consensus mechanism used for blockchain. It is used by Bitcoin, Ethereum 1.0, Litecoin, Dogecoin and many other cryptocurrencies. It was designed for a platform that deals mainly with financial transactions. Verifying those transactions via the Proof of Work method is highly energy-intensive. There are legislative efforts in some jurisdictions to limit or ban Proof of Work mining because of environmental concerns. When blockchain technology developed to a point where many more applications were being utilized, a less energy-intensive consensus mechanism was sought. That mechanism is Proof of Stake and it is designed for the vast array of applications already used by blockchain now and into the future. It is the consensus mechanism on the upgraded Ethereum blockchain, Ethereum 2.0, which already processes multitudes of DeFi (decentralized finance) transactions, smart contracts and NFT sales. Cardano, Avalanche, Polkadot and Solana are examples of other cryptocurrencies that use the Proof of Stake method. Both have their pros and cons and sometimes, their greatest strengths and weaknesses are closely aligned.
Proof Of Work – The Pros And Cons
- Competition is fierce to validate blocks, increasing speed and efficiency
- Miners attempt to reduce their energy costs by searching for cheaper alternatives, promoting renewables.
- Trapped energy in remote locations that might go unused can be utilized and sold to miners with an internet connection and hardware.
- Expensive hardware and energy costs act as a deterrent to fraud.
- The enormous energy costs associated.
- The potential for legislative bans because of environmental concerns.
- The rise in electronic waste as older chips are superseded.
- The danger of monopolies or “mining pools” controlling the blockchain forming a kind of centralization.
- The potential for mining facilities to be shut down by authorities, having been identified by the vast amounts of energy they are consuming.
Proof Of Stake – The Pros And Cons
- Uses little energy to verify a blockchain.
- Without complex mathematical problems to solve, transaction speeds and efficiency is increased.
- With little energy being used, it is virtually impossible for authorities to identify and shut down validators.
- Expensive hardware not needed, only purchase of tokens i.e. the “proof of stake”.
- The method remains unproven at the level of Bitcoin and Ethereum.
- It requires large scale purchase of coins which can lead to a form of centralization.
- A significant upfront cost or “stake” makes it exclusive – for Ethereum 2 that cost is 32 ETH.
- Lower ongoing costs makes it more attractive and potentially susceptible to fraudsters.
The History Of Proof Of Work And Proof Of Stake
1993 – The concept of Proof of Work was conceptualized as a way to deter denial-of-service attacks.
1999 – The term “Proof of Work” was first coined.
2009 – Bitcoin goes online as a digital currency using the Proof of Work function to verify transactions.
2012 – Peercoin becomes the first cryptocurrency to use Proof of Stake to verify transactions.
2015 – Ethereum is launched, adopting Proof of Work to verify transactions.
2020 – Ethereum 2.0 begins its launch in December in a rolling phase over several years, utilizing Proof of Stake verification.
2022 – Several EU countries including Germany and Sweden, as well as the State of New York, explore legislation that would limit or even ban Proof of Work mining over energy concerns.
The Power Of Cryptocurrency
Crypto mining can be a lucrative business and it has coined the term “trapped energy”. The Sichuan and Yunnan provinces in China produce vast amounts of excess hydroelectric energy, generated by their wet seasons, with no way of transporting it for profit. Mining bitcoin through Proof of Work proved a lucrative solution. By 2019, more than 70% of Bitcoin’s hash rate emanated from China, until it banned crypto mining, seeking to create its own fiat digital currency. The mining industry quickly moved elsewhere, in search of cheaper energy.
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