There are literally hundreds of cryptocurrencies available in the market today and it is important to understand that there are differences between these cryptocurrencies. Obvious difference would be their ideologies, team members, motives behind development, and uses.
However, today we will be considering the simple technical differences which govern the currency’s future, inflation, and investor rewards. This simple difference is ‘Proof of Work (PoW)’ and ‘Proof of Stake (PoS)’. Before we begin explaining their differences, it is important to acknowledge that cryptocurrencies – all of them – have their own blockchain to store and record transactions.
Proof of Work and Proof of Stake algorithms are different in the sense that they have different methods in achieving the consensus on which block will be next added on the blockchain.
Proof of Work (PoS) works by requesting a proof that some kind of work has occurred on the Blockchain. As such, Bitcoin is a PoW cryptocurrency whereby Bitcoin miners are required to ‘mine’ and do the work before any new blocks are accepted on the blockchain.
Proof of Stake (PoS) allows users with high amounts of the currency to determine and accept new blocks on the blockchain. Although, there exists, a risk of monopoly, there are several methods preventing this – allocating random stakeholders to agree on a new block, etc.
To simply put, the main difference between these two algorithms is in the fact that PoW requires ‘external resource’ such as mining hardware whilst PoS does not. PoW is however, arguably risky in the long-run as with reduced rewards (block halving) and market volatility – nobody can ever know how well a currency will be performing in the future, and thus, makes mining much of a gamble. On the other hand, PoS is risky in the sense that a monopoly can occur – those with high amounts of currency fundamentally control the blockchain. However, no external resources are required – no waste of energy – and it gives everyone a chance to earn the currency by simply staking them on their wallets.
PoW Examples: Bitcoin, Litecoin, Ethereum (scheduled to change to PoS soon)
PoS Examples: BitShares, NXT
Peercoin uses a combination of PoW and PoS