Proof of Stake vs. Proof of Work

Proof of Stake vs. Proof of Work: what is the difference?

Decentralization is a key factor in blockchain technology which has revolutionized the process of how blockchain projects work.

The bridging of the Ethereum blockchain, which saw the development of parachains and Ethereum forked chains which included smart contracts that gave birth to other blockchain projects, has seen tremendous improvements in recent years. 

One of the major selling points of a decentralized blockchain is the reliability of security and transparency in transactions. However, many would wonder about the possible mechanism which helps in verifying transactions before adding them to a blockchain network.

What is proof of Stake (POS)?

Proof of stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, this distributed database is called blockchain and the consensus mechanism secures the blockchain.

The proof of stake algorithm does not depend on computers competing with each other for generating the suitable hash. On the contrary, the PoS protocol focuses on determining participation according to ownership of the coin supply by users (sometimes referred to as validators).

Basically, proof of stake consensus replaces computational power with currency power. Therefore, the ability for validating transactions depends on the ‘stake’ of the users in the network. 

Proof-of-stake changes the way blocks are verified using the machines of coin owners. The owners offer their coins as collateral for the chance to validate blocks. Coin owners with staked coins become the key validators for the consensus mechanism.

Proof-of-stake is designed to reduce the scalability and environmental sustainability concerns required for validation of the blocks as compared to the proof-of-work (PoW) protocol which is a competitive approach to verifying transactions, naturally encouraging people to look for ways to gain an advantage, especially since the monetary value is involved. This means there should be a drastic reduction in energy consumption since miners can no longer rely on massive farms of single-purpose hardware to gain an advantage.

In the likelihood that there is a 51% attack on the blockchain, which would require an individual to own over 51% of the total coins staked, it is not only very expensive to have 51% of the staked cryptocurrency, as the staked currency will also serve as collateral for the privilege to mine, the miner(s) that attempt to revert a block through a 51% attack would lose all of their staked coins.

What is proof of work?

On the other hand Proof of Work (POW) uses a competitive validation method to confirm transactions and add new blocks to the blockchain. Proof of Work involves bundling a group of transactions in a mempool, and miners have to verify the validity of transactions by solving a cryptographic puzzle.

One of the critical factors associated with differentiating between PoW and PoS consensus algorithms is energy efficiency. Proof of Work consensus algorithms focuses on identifying the user who could modify the ledger by leveraging a competitive race. However, such participants in the race or miners have to use computational energy for proposing valid blocks that follow the network rules.

The miners have the flexibility for using any type of energy sources such as wind, hydropower, and other sustainable energy sources for the process of achieving computational power.

Conversely, one of the key attributes of the consensus mechanism is the rewards associated with the processes. There is a high reward to the miners who are able to use the computational power to achieve the required block formation. 

The block reward reduces after the discovery of a specific number of blocks for maintaining the total money supply in a finite and deflationary state as in the case of Bitcoin, which can be referred to as the first cryptocurrency with a block reward mechanism. Interestingly, the term ‘block reward’ holds the same meaning in the case of PoS consensus. 

In conclusion, a basic understanding of these terminologies can help broaden the users’ perspective on how these consensus mechanisms work. Use this learning opportunity to key into the Klever validators program.

It is a Klever thing to do.

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Disclaimer: This article is for informational purposes only. The information does not constitute an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Klever.Finance does not provide financial, tax, legal, or accounting advice. There is no responsibility on the part of the company or the author for any loss or damage arising from or related to the use of or reliance on any content, goods or services mentioned in this article.

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