Key Takeaways:
- Proof of Work (PoW) makes miners compete in solving complex mathematical problems to validate transaction blocks.
- Speed and quantity of transactions are limited on PoW networks.
- PoW uses more electricity due to its competitive nature.
- Proof of Stake (PoS) randomly selects validators to validate transaction blocks.
- Transactions validated faster on PoS networks than PoW.
- Processes are less energy-intensive, and therefore PoS is comparatively more environmentally friendly.
What Are Consensus Mechanisms?
Cryptocurrencies are designed to be decentralised and distributed, with the transactions on the blockchain transparent to, and verifiable by, anyone. Due to the immutable nature of most blockchains, this means that the data entered is largely irreversible.
Proof of Work (PoW) and Proof of Stake (PoS) are common consensus mechanisms used for processing transactions and creating new blocks on a blockchain. These two types of consensus mechanisms incentivise good behaviour and make it difficult and expensive to act maliciously. When functioning as intended, this prevents fraud like double-spending, the act of making payments twice with the same currency in order to deceive the recipient of those funds.
Not familiar with consensus mechanisms yet? Get a 101 on consensus in this article.
What Is Proof of Work (PoW)?
PoW relies on miners to solve a complex mathematical problem using computing power, a process also known as mining. In short, once the puzzle is solved, a new block on the blockchain is validated. The fastest to solve the puzzle is allocated with a reward (e.g., a certain amount of Bitcoin). It is the miners’ combined efforts that secure a blockchain’s operation for all parties.
Learn all about Bitcoin in this in-depth introduction.
How Does PoW Work?
Through a competitive race where miners compete to solve the puzzle, the miner who manages to solve the puzzle creates the new block and confirms the transactions, which are then placed in this block. The difficulty of the puzzle is adjusted up or down depending on how rapidly blocks are added to the network. As the ledger is distributed, miners can reject an altered version, thereby avoiding tampering.
The following cryptocurrencies rely on PoW:
Bitcoin $BTC
How to trade Bitcoin – learn more here.
What Is Proof of Stake (PoS)?
PoS is a newer approach that aims to address some of the inefficiencies of the PoW consensus mechanism and reduce the computational resources required. Instead of performing energy-intensive mathematical computations, network participants, known as validators, need to stake an amount of tokens on the network in order to activate their ability to create new blocks.
How Does PoS Work?
In PoS networks, verification of transactions is achieved by randomly selecting validators to confirm transactions and validate block information. To become a validator, a coin owner must ‘stake’ a specific amount of coins to a node they operate. The chance of being selected as a proposer of the next block is proportionate to the amount of tokens staked by a node.
Validators are selected randomly to confirm transactions and validate block information. This system randomises who gets to collect fees rather than using a competitive rewards-based mechanism like PoW. Blocks are validated by more than one validator, and when a specific number of validators verify that the block is accurate, it is finalised and closed.
Different ecosystems have different requirements with regards to a node operation. For example, on the Ethereum network, anyone can start a node by staking 32 ETH. Other networks, such as Cardano and Polkadot, may have different requirements set to be an active validator. For example, Polkadot selects validators by nomination.
The following cryptocurrencies rely on PoS:
Ethereum’s Transition From PoW to PoS — AKA ‘The Merge’
On 15 September 2022, Ethereum successfully transitioned from a POW consensus mechanism to PoS, reducing its energy consumption by ~99%. The transition has been dubbed Ethereum 2.0, or ‘The Merge’.
Learn all about Ethereum 2.0 and ‘The Merge’.
Ethereum 1.0 was a PoW chain requiring users to compete in terms of computing power in order to be the first to solve a mathematical problem and gain rewards. This is not only costly in terms of having the equipment, but also in the cost of the electricity required to power the mining rigs.
However, with the transition, Ethereum 2.0 morphed into a PoS network where validators are required to stake 32 ETH to activate a node and perform validation of the transactions. A validator is chosen for every block proposed and earns network fees from the transactions. This is what facilitated a stark drop in energy consumption, as there is no need for validators to own expensive and energy-consuming mining rigs.
PoS vs PoW at a Glance
| Proof of Work | Proof of Stake | |
|---|---|---|
| Mining/Validating a block | Determined by computing power to solve a mathematical puzzle | Determined by the amount of tokens staked in general, with larger stakes more likely to propose a block |
| Reward | Miner of the block is awarded with new minted token | Proposer of a block is awarded with block rewards and network fees |
| Competition | Miners compete based on computing power | A validator is chosen with probability proportional to the size of the stake |
| Equipment | Increasingly requires specialised equipment, such as GPUs | Standard server-grade device |
| Efficiency and Reliability | Increasingly expensive equipment and high energy consumption | Relatively more cost-efficient |
| Security | The greater the hashrate, the more secure the network | Staking rewards and slashing helps to secure the network |
| Ability to introduce malicious blocks | Would require a hacker to have at least 51% of computing power | Would require a hacker to control at least 51% of total tokens staked |
| Mining/Validating a block | |
| Proof of Work | Determined by computing power to solve a mathematical puzzle |
| Proof of Stake | Determined by the amount of tokens staked in general, with larger stakes more likely to propose a block |
| Reward | |
| Proof of Work | Miner of the block is awarded with new minted token |
| Proof of Stake | Proposer of a block is awarded with block rewards and network fees |
| Competition | |
| Proof of Work | Miners compete based on computing power |
| Proof of Stake | A validator is chosen with probability proportional to the size of the stake |
| Equipment | |
| Proof of Work | Increasingly requires specialised equipment, such as GPUs |
| Proof of Stake | Standard server-grade device |
| Efficiency and Reliability | |
| Proof of Work | Increasingly expensive equipment and high energy consumption |
| Proof of Stake | Relatively more cost-efficient |
| Security | |
| Proof of Work | The greater the hashrate, the more secure the network |
| Proof of Stake | Staking rewards and slashing helps to secure the network |
| Ability to introduce malicious blocks | |
| Proof of Work | Would require a hacker to have at least 51% of computing power |
| Proof of Stake | Would require a hacker to control at least 51% of total tokens staked |
Which Is Better — PoW or PoS?
Consensus mechanisms are an integral part of blockchain networks, ensuring decentralisation of the parties in charge of validating transactions. To achieve a blockchain’s paradigm characteristics of being immutable, trustless, and distributed, a reliable consensus mechanism is required.
The type of consensus mechanism that is most suitable depends on the needs of a network. For instance, PoW is usually said to be more suitable for fraud prevention, security, and trust-building in a network. For the most part, in practice, even if there are exceptions in theory, miners cannot be misled about a transaction because of the protection provided by PoW, which secures a crypto asset’s transaction history while also increasing the difficulty of changing data over time.
Similarly, network performance and scalability are commonly said to be two key upsides of using a PoS-based consensus mechanism. PoS is often utilised when high transaction speed is required for on-chain transactions per second (TPS) and actual network transfer settlement. Moreover, validators could be penalised for mistakes or fraud, which financially incentivises them to keep the chain secure.
Due Diligence and Do Your Own Research
All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cyber-security, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.
Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
