In the world of cryptocurrency, there are a couple of different ways to verify and validate a block or transaction. Participants need to understand Proof of Work vs. Proof of Stake as two different methods that achieve a similar result. There are many opinions regarding which system—Proof of Work or Proof of Stake—is better. Anyone who wants to get involved with cryptocurrency needs a deeper understanding of these two systems.
Cryptocurrency Transactions 101
It’s impossible to discuss Proof of Work vs. Proof of Stake without going over the basics of cryptocurrency and how it is created and distributed. Virtual or digital currency that is secured by cryptography is known as cryptocurrency. It is exchanged via account to account transactions with no third party, such as a bank.
To ensure that cryptocurrency transactions are legitimate, they reside on a blockchain, which is a public ledger that is shared between many different computers. The blockchain is permanently recorded transactions.
Every type of cryptocurrency needs a way to validate the work and prove to everyone else that it is correct. Proof of Work and Proof of Stake have to do with the different methods that people use to collect coins, validate a transaction and ensure its correctness.
What is Proof of Work?
The Proof of Work (PoW) system is driven by output and competition. Miners dedicate their computer’s processing power to unlock algorithm puzzles to successfully verify a transaction. There are many miners competing on various transactions. The first one to solve the encryption wins a block reward, or a certain amount of that transacted currency. Their reward appears on the public ledger, verifying the integrity of the cryptocurrency.
Many analogies have been created to try to explain the Proof of Work system to people who are just getting into cryptocurrency. The most common description is of a math competition or test, where different students are working to resolve a math problem. The student who solves the problem first gets the prize and the answer is shared with the rest of the class.
Supporters of the Proof of Work system point out that one of the main benefits is that it is extremely difficult to attack and therefore is much safer than the alternative. Because the Proof of Work system was designed to primarily deter cyberattacks, once transactions are written in the public blockchain, they are very trustworthy. It is very difficult to cheat the system.
Critics of the Proof of Work system say that it requires lots of computing power that isn’t always available to everyone, plus it takes a lot more electric power, which is bad for the environment. Miners may not get as many block rewards as more coins are released, due to supply and demand. It would then be harder to keep the loyalty of miners with the Proof of Work system. That’s because they are likely to leave and work on different coins with greater rewards.
Here’s a quick summary of the Proof of Work system:
- The original system for cryptocurrency.
- Produces data that is time-consuming and costly to create but simple to verify by others.
- Miners compete against each other to verify transactions.
- The first miner to resolve the puzzle receives the reward.
- Very resistant to vulnerabilities and attacks.
- Takes up a lot of resources and requires very powerful, specialized computer hardware.
- The majority of cryptocurrencies use a Proof of Work system.
What is Proof of Stake?
An alternative process to verify transactions on a blockchain is known as Proof of Stake (PoS). With a Proof of Stake system, the user, known as a forger instead of a miner, has ownership of a certain amount of the stake. They do this by putting up a certain amount of their own coins, known as a “stake,” to verify the transactions via cryptographic calculations.
A forger is chosen by an algorithm that is based on the amount of coins they own and sometimes for how long they have owned them. The higher the stake, the more likely the forger is to unlock the encryption. When forgers finally validate transactions, they receive the transaction fees instead of block rewards.
The Proof of State system doesn’t require an elite computer system and expensive hardware to unlock the puzzles, as they are a little simpler. Because any online computer can participate, it results in a larger potential community because more people can become a forger, making the cryptocurrency more widely available. Essentially, it is a more affordable form of consensus for cryptocurrency transactions, at least for those who purchase their staked coins early, when the price is low. Supporters point out that Proof of Stake is also better for the environment because the process doesn’t use up as many resources.
Critics of the Proof of Stake system say that it’s a disadvantage for participants because the only way someone can acquire coins is from someone that already has them, unlike the Proof of Work system where the coins are the reward for mining. Another disadvantage is that Proof of Stake is seen as more vulnerable to attack than Proof of Work.
Here’s a quick summary of some features of the Proof of Stake system:
- It uses consensus algorithms that depend on a participant’s economic stake in the network.
- Forgers volunteer to lock up some of their stake in a type of deposit.
- The reward for forgers for participating is the transaction fee.
- The system doesn’t require extensive hardware or lots of resources.
- Potentially more affordable and better for the environment.
- Viewed as less impervious to attacks
Which Is Better? Proof of Work or Proof of Stake?
There are supporters and critics of both systems, so participants need to learn as much as they can to determine which one they feel is best. People who support Proof of Work like the fact that it is very secure, efficient, and powerful. Proof of Stake fans say that the system is environmentally friendly, more affordable, and accessible to more people.
Above all, the most important feature of both the Proof of Work system and the Proof of Stake system is that they ensure that cryptocurrency is decentralized, ensuring no one controls it.