In this article, we want to explain the difference between Proof of Work and Proof of Stake. You probably might have heard of “Proof of Work” in context with blockchain. But did you know there is another method the so-called “Proof of Stake”? Therefore we will discuss the main differences Proof of Work and Proof of Stake. We will also clarify which method is more relevant for the future.

Evolution of Proof of Work

The idea of Proof of Work existed even before Bitcoin. Only a few people know that Satoshi Nakamoto did not invent this type of protocol. In fact, it was Cynthia Work and Moni Naor who came up with this concept in 1993. The main goal was to deter cyber-attacks such as a distributed denial-of-service (DDOS) attack. They send several fake requests to exhaust the resources of the computer.

In 1999 Markus Jakobsson and Ari Juels were the ones who published the term ‘Proof of Work’ in a document. But nonetheless, Proof of Work is maybe the biggest idea behind Nakamoto’s Bitcoin white paper – allowing us a persistent transparent public append-only ledger. It is a mechanism of creating consensus between distributed parties. So you don´t need to trust each other but trust the system. In the following, we will explain to you the concept of Proof of Work and Proof of Stake.

What is the Proof of Work?

Because not everyone in the network is honest, there has to be a way to prevent cheating. So to secure the Network, miners validate incoming transactions and note them in the block. They all compete by solving a complicated cryptographic puzzle. The solution found is proof that the miner has performed his work to validate the transaction. The first one to find the solution gets a reward. For example, he gets an Ether as payment. We call this process mining. You can use this process for two things in the network. The first one is to verify the legitimacy of a transaction. Secondly to create a new digital currency by rewarding miners for performing the previous task.

This mathematical puzzle has a key feature, it is asymmetrical. That means that the puzzle must be hard to solve for the miners. But at the same time, it has to be easy for the network to check if the solution is correct. They can only solve the puzzle by randomly trying. This requires a huge number of attempts to get the right solution. If a miner finds the right solution, he announces it to the whole network and receives a reward. So the effort of a miner to validate and secure incoming transaction is called Proof of Work.

Problem with Proof of Work

However, this process requires a ton of computing power. Proof of works gives more rewards to people with better equipment and connection. This means the higher your hash rate is, the better is the chance to be the first one that solves the mathematical puzzle. This led to a situation where people are building huge mining farms. Miners even come together to push their chances even further to so-called ‘mining-pools’. All miners of the pools then receive an equal reward. So this is causing the blockchain to become more centralized. Therefore we need to find a better way to validate a transaction with proof of work.

What is the Proof of Stake?

To avoid getting to centralized with the Proof of Work method, we need to find a better solution to validate and create blocks. For this purpose, they invented Proof of Stake. For Proof of Work an algorithm rewards miners who solve mathematical problems. But with Proof of Stake, the creator of a new block is chosen in a deterministic way. Thus, it depends on your wealth and stake. They previously create all the digital currencies and their number never changes. The miners will not get any reward for creating a block. Instead, they get transactions fees as a reward.

To become a validator you have to deposit a certain amount of coins into the network as a stake. The size of this stake determines the chances of a validator to forge the next block. So the more you put in the higher your chances are.

That sounds unfair because it favors the ones who deposit the most money. But in reality, it’s by far fairer then Proof of Work. The price rich people pay for the mining equipment and electricity bills don’t go up in a linear fashion. Instead the more they buy the cheaper it will get.

But how to trust the other validators?

So a chosen person can validate and create the next block. If he approves a crooked transaction in this block, he will lose a part of his stake. But as long as the stake of the validator is higher than the reward of the transaction fees, we can trust him. If it doesn’t, they will lose more money than they gain. So there is a financial motivation to act properly and trustworthy.

Problem with Proof of Stake

There are some flaws in the Proof of Stake algorithm. Rich people will get chosen more often which means they will get more transaction fees. Making them richer and therefore increase the chance of being chosen as a validator. And even more problematic is that validator sometimes doesn’t show up to do their job. Therefore Proof of Stake is a better version then Proof of Work but still needs to be optimized.

Proof of Work and Proof of Stake – Let’s summarize everything:

• In the early development, the main goal was to deter cyber-attacks
• Proof of Work and Proof of Stake prevents cheating
• Solving a complicated cryptographic puzzle is called Proof of Work
• Proof of Stake chooses the creator of a new block in a deterministic way which depends on its wealth
• Digital currencies are previously created and their number never changes
• Proof of Stake is a better version then Proof of Work but still needs to be optimized.

For more interesting content all about Blockchain, have a look at this article about cryptographic hash functions.