Proof-of-Work and Proof-of-Stake are the two most well-known consensus algorithms in cryptocurrencies that offer differently structured mechanisms. Both methods have their pros and cons. However, understanding what Proof-of-Work (PoW) and Proof-of-Stake (PoS) are will help when evaluating a particular cryptocurrency.
Our expert Alex in this article, will explain the basics of both mechanisms, point out the advantages and disadvantages, and predict the future of both algorithms. Maybe this knowledge will help you to earn more in the field of cryptocurrencies.
What is Proof-of-Work?
Proof-of-Work is an algorithm for protecting distributed systems from abuse (DoS-attacks, spam-mailing, etc.), the essence of which boils down to two main points:
- The need to perform a specific, rather complex, and time-consuming task.
- The ability to quickly and easily check the result.
PoW-tasks are not initially designed for humans; their solution by a computer is always achievable in a finite time but requires a lot of computing power. At the same time, the verification of the obtained solution requires much fewer resources and time.
How PoW Works?
Proof-of-Work (PoW) is used when the technical equipment of the miner solves complex mathematical problems. The miner receives a reward in the form of cryptocurrency for adding a verified block to the blockchain. Finding solutions is a complex process that requires a lot of computing power.
Once a computer finds a solution, it sends a message to other computers in the community to verify. The solution is easy to confirm because the other computers are answered. All processes of transactions and cryptocurrency mining in the network consist of the following steps:
- Sending a transaction by a user to his counterparty.
- Legitimization of the trade by hashing.
- Formation of blocks of a given capacity of 1MB from randomly selected transactions.
- Construction of a blockchain from sequentially solved blocks and synchronization.
- The reward for the miner who solved the Proof-of-Work tasks first.
Pros and Cons of PoW
|Less susceptible to centralization.||The need for high electricity costs.|
|More common, has a long history and is respected among miners.||Damage to the environment.|
|There is an opportunity to get more reward than in the case of PoS.||A constant technical race of equipment.|
|No need to keep funds in the account as a tool to make money.||A miner is forced to spend huge amounts of money to maintain the technical condition of the mining machines.|
|High risk of attack 51%.|
|Mining participants are forced to face a constant increase in the level of complexity of coin mining, and as a consequence – a decrease in profits.|
What is Proof-of-Stake?
An alternative consensus mechanism was first implemented in 2012 in the cryptocurrency PPCoin (now known as PeerCoin). The idea is to use a share as a resource that determines which node gets the right to mine the next block.
In the Proof-of-Stake approach, nodes also try to hash data in search of a result less than a specific value. Still, the complexity, in this case, is distributed proportionally and according to the balance of a given node.
Thus, a node with a larger balance has a better chance of generating the next block. The scheme looks quite attractive because of low computational resource requirements and because there is no question of wasted power.
How PoS Works?
Unlike Proof-of-Work, where the algorithm rewards miners who perform calculations to validate transactions and create new blocks, in Proof-of-Stake, the system’s creator is selected by the system in advance of its state, i.e., share in the total amount of cryptocurrency.
Proof-of-Stake is used when a miner blocks a predetermined number of coins to verify a block of transactions. The cryptographic calculations in PoS are much more straightforward for computers. You only need to prove that you own a certain percentage of all coins available in a given currency.
Pros and Cons of PoS
|The very possibility of forming a PoS attack is extremely costly on the financial side. The effort required to execute it makes the attack almost unrealistic.||To get a percentage of the commissions, you need to keep your wallet online at all times.|
|Smaller commissions.||Real earnings require a large sum of money, which the user cannot dispose of, because it will be a pledge of forging.|
|Eco-friendliness.||Possibility to create a collusion of a group of validators.|
|There is no need to purchase special equipment to make money.||The principle of enrichment through accumulation jeopardizes the decentralized system.|
Which Algorithm is Better?
PoW and PoS are two different worlds that have only one thing in common: the goal of getting coins. It is worth understanding that projects built on the principle of Proof-of-Work may sooner or later get the opportunity to switch to Proof-of-Stake.
The fact is that in the case of limited issuance, which is one of the key elements in maintaining the value of the coin, along with the increasing complexity of mining, the total number of coins to be mined will sooner or later come to zero.
In this case, miners will lose the opportunity to earn money, and the project itself will have to find other solutions to work with the participants of its system. Speaking about who will win in the end, the more modern PoS, which takes into account the needs of current users and is less harmful to the environment, is clearly in the lead.
That said, PoW will forever go down in history as the consensus that brought the birth of the mining industry to the vast number of people aware of the possibilities of making money from cryptocurrencies.
What Other Algorithms are Known?
Proof-of-Work and Proof-of-Stake can be considered the two most popular consensus algorithms in the cryptocurrency world. Still, in addition to them, several mechanisms have their subtleties and features. Their list can turn out to be quite long, so let’s list a few of the most well-known ones:
- Proof-of-Capacity. To get started, the user must provide the system with a certain amount of internal device memory. The main principle of mining is the monetization of resources.
- Proof-of-Activity. It is a widespread mix of the merits of PoW and PoS.
- Proof-of-Storage. The work also requires free device resources, which creates cloud storage: it can be used later by project participants.
- Proof-of-Burn. The work begins when the user voluntarily burns his coins by sending them to a particular address (its peculiarity is that the received funds can no longer be used as a financial instrument). After performing this procedure, the user has the opportunity to start mining coins.
- Delegated Proof-of-Stake. This is an evolved version of PoS in which share confirmation has undergone some technical improvements.
Thus, PoW and PoS capabilities differ significantly from each other. Due to the disadvantages of each method, a sufficient number of alternatives have emerged. It is likely that shortly, the cryptocurrency community will be presented with a new, much better consensus, in which all the advantages of previous proposals will merge, eliminating possible technical problems by their weight.
As you get more and more into the world of cryptocurrencies and the processes that take place in the blockchain, you can’t help but wonder how fast everything is changing, but that’s the beauty of it. If you want to keep up with this world, Artex Global can help you. We have a vast archive of articles on everything from the definition of Bitcoin and Ethereum to a comparison of U.S. crypto exchanges. Stay tuned, so you don’t miss anything!
I have been studying cryptocurrency for over 5 years. I have accounts in every exchange and I test everything on myself.
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