I bet you have probably stumbled upon these terms on your cryptocurrency journey. So, what really are they – what is proof of work (PoW), and what is proof of stake (PoS). How do they come into play in the crypto space? This article gives a beginner-level overview of what both terms mean. However, before we delve in to explore both concepts, let’s look at what mining is.
Mining
Mining is the process of validating a cryptocurrency transaction or block by solving complex mathematical algorithms. Once a block is validated, it is added to the chain. Miners are individuals or corporations that have high-power computers to solve these algorithms. As a reward for their processing power, miners get a fraction of the confirmed transaction.
In the crypto space, there needs to be a form of consensus on how transactions should be validated. This forms the basics of PoW and Pos.
Proof of Work (PoW)
As the name implies, it is the validation of work done and proving that it is correct. Bitcoin and many altcoins run on a PoW structure. In this system, miners compete against each other to solve the algorithm and receive a reward. Currencies that run on PoW consensus include Bitcoin, Litecoin, and Monero.
Some of the benefits of PoW consensus is that is has a very solid defense against DoS attacks. Before someone can invalidate a particular transaction, he must have a lot of computational power and spend lots of time to perform this. While this is possible, the associated costs are too high. Also, holders of large amounts of a cryptocurrency cannot make decisions for the entire network since what matters is computation power. Some of the downsides of PoW include:
- The need for more electricity, which is expensive and damaging to the environment
- The possibility of miners shifting to mine a more profitable coin
- Increased difficulty and lesser reward for miners
Proof of Stake (PoS)
PoS is an alternative to PoW. On discovering the wastefulness of PoW consensus, some cryptocurrency projects are now opting for PoS. Instead of using miners who solve complex algorithms to validate blocks, PoS consensus uses “validators”, or in a more appropriate term, “stakeholders”. Validation and decision-making rights are given to large holders who have kept their coins as a stake. What this means is that no whale investor can step in and sway the decision-making process by simply depositing large amounts of fund. There is an age attached to every deposit, and once the coins are move from one address or wallet to another, the aging resets. Combining a large amount and a good age, as well as other factors, a validator will get the chance to confirm a block. This allows for building a loyal system. Similar to PoW, validators earn a part of the transaction fee.
Some PoS coins include Cardano, Ardor, and QTUM.
Bonus Tips
- While PoW uses mining, PoS operates a process called forging
- In PoS validators own some stake in the network, while in PoW miners own hardware
- PoW functions on work, while PoS functions on trust
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