Proof of Stake vs. Proof of Work: Explained

Proof of stake and proof of work are the two most common methods of verifying cryptocurrency transactions today. If you’re new to the world of cryptocurrency, you might be wondering how these mechanisms differ.

Since proof-of-stake and proof-of-work methods are the cornerstones of blockchain technology, understanding how they operate is fundamental to understanding this mechanism.

With that in mind, let’s dive into how these mechanics work and their pros and cons.

Proof of Stake vs. Proof of Work

Proof-of-stake and proof-of-work methods have one thing in common. They are both consensus mechanisms. As the name suggests, they aim to reach a consensus among the network users on which blocks of transactions will be added to the blockchain. Achieving consensus ensures that the users are honest with transactions and that the transactions are legitimate.

However, the difference between these two mechanisms lies in how they reach this end goal. These different methods of achieving consensus have pros and cons, which can be crucial in deciding which to use.

Proof of Stake vs. Proof of Work: Basic Principles

Proof of work was the first consensus mechanism to be used, as Bitcoin, the first cryptocurrency, employed it. This method relies on “mining” or solving complex mathematical equations to add valid blocks to the chain.

Each transaction block contains the following:

  • Block difficulty
  • MixHash
  • Nonce

Miners use massive amounts of computational resources in a race to find the nonce for a block. The nonce is a value generated only once for that specific purpose. Together with the mixHash, it guarantees a sufficient amount of computation has been carried out on a particular block.

As a result, it’s easy for other miners and clients to verify it. Once the block becomes a part of the chain, anyone with an internet connection can view it. The miner who’s added the block can be rewarded by earning cryptocurrency.

Regarding proof of stake, validators add new blocks to the chain instead of miners. Users can stake their coins as collateral, thus voting for the block they think should be added to the chain. Validators are selected randomly from the pool of users who’ve purchased and staked coins and have the final vote on which block is added.

Validators are paid over time with the newly created currency as a reward for approving legitimate transactions. In contrast, if a validator acts dishonestly, their stake can be destroyed.

Proof of Stake vs. Proof of Work: Profitability

Currently, the proof-of-work is the only mechanism to have been proven to be profitable on a large scale.

Most major cryptocurrencies have used this method since their inception, including the following:

However, an increasing number of platforms are using the proof-of-stake mechanism, the most notable being the following:

Unfortunately, none of these platforms have been around long enough to demonstrate their effectiveness and profitability in the long run.

But, it should be noted that Ethereum is in the process of transitioning from proof of work to proof of stake. This monumental transition will undoubtedly impact the profitability of both mechanisms, considering that Ethereum is currently the only mainstream blockchain besides Bitcoin.

Proof of Stake vs. Proof of Work: Security

Under the proof-of-work system, the more difficult a block is to mine, the more time, energy, and resources are used. These significant investments make it extremely difficult for bad actors to verify invalid blocks, erase transactions, or engage in double-spending. Simply put, the resources spent trying to “attack” the system far outweigh the gains a malicious miner would receive.

Most importantly, this method’s security has been substantiated, with Bitcoin safely storing over $1 trillion in value at multiple points.

In contrast, the proof-of-stake mechanism isn’t as extensively vetted compared to its competitor. Therefore, there’s still a debate about how secure the proof-of-stake mechanism is.

As there are no costs of forging, users have nothing to lose. This makes it easier to influence the protocols and tamper with competing blockchain branches. Susceptibility to attacks significantly decreases the overall security of a blockchain.

Proof of Stake vs. Proof of Work Security

Proof of Stake vs. Proof of Work: Environmental Impact

The proof-of-work consensus mechanism is to blame for one of the most prevalent criticisms of cryptocurrency: its detrimental effect on the environment.

At its core, mining is a race for who can solve complex mathematical problems the quickest. As a result, miners tend to look for any way to gain an advantage. This includes running powerful computers 24/7 and establishing massive farms of hardware equipment.

Running these farms leads to alarming amounts of power consumption. In fact, the electrical energy consumption of the leading networks like Bitcoin and Ethereum can be compared to that of a whole country. According to some estimates, mining Bitcoin requires the same amount of power as the country of Argentina, while Ethereum is comparable to Qatar.

Moreover, the miners are always looking for more computing power and disposing of outdated systems. This excessive use of single-purpose hardware equipment results in massive electronic waste.

Since the proof-of-stake mechanism doesn’t rely on mining and machines, it’s drastically more environmentally friendly. Furthermore, this method was developed in response to the high computational costs and power consumption of proof-of-work protocols.

Proof of Stake vs. Proof of Work: Centralization

Decentralization is a defining characteristic of the most prominent cryptocurrency platforms. Still, users can find a way to concentrate power in one place.

The proof-of-stake mechanism has been criticized for being less decentralized and democratic. Although validators are chosen randomly, the system favors those with the most money, entrusting them with creating new blocks. On top of that, there’s no limit to how many coins a single validator can stake in certain cryptocurrencies.

In contrast, anyone with a computer and internet connection can earn rewards under the proof-of-work system, creating an open competition. As a result, block creation is better distributed and the process more decentralized.

Imagine individuals with vast computing power trying to centralize block creation. In that case, miners can pool their resources together and compete for the rewards.

To be fair, validators can also pool their money together to compete with wealthier validators. This process is called a staking pool, which aims to help prevent centralization.

Proof of Stake vs. Proof of Work: Scalability

Scalability is one of the most important characteristics of a blockchain, and it primarily refers to its transaction speed. For a blockchain to be scalable, it must be able to handle a large number of transactions per second without compromising the network’s security.

Proof-of-work networks lack scalability, as blocks take a lot of time and energy to be verified. Since the proof-of-stake mechanism doesn’t involve solving complex, time-consuming equations, it can approve transactions significantly faster.

To put this in context, Bitcoin can carry out between three and seven transactions per second, while Avalanche can complete 5000.

The cost of transactions is another vital element of scalability. Proof of stake also wins this battle, thanks to considerably less expensive transaction fees.

Proof of Stake vs. Proof of Work: Initial Investment

Proof of stake requires a considerable initial investment, as you must purchase enough coins to qualify as a validator. The specific amount depends on the platform you’re using. Regardless of the amount, wealthy people generally have a significant advantage.

With cryptocurrencies rising in market value, this issue could worsen, creating exclusively rich blockchains.

As for proof of work, you don’t have to have any coins to get started. But, you need to invest in computing equipment, unlike with proof-of-stake.

Still, the proof-of-work method requires a lower initial investment because users could start with more affordable hardware and work up to powerful equipment.

Proof of Stake vs. Proof of Work: Penalization

The proof-of-stake consensus mechanism has strict measures to incentivize good actors and penalize bad ones. If a user tries to commit a fraudulent transaction, a percentage of their staked tokens can be destroyed. This penalty is known as slashing. This way, users have an economic incentive only to approve valid blocks.

While it can be costly and time-consuming for proof-of-work miners to engage in similar activities, there’s no way to penalize them if they do. Since mining is inherently anonymous, it’s impossible to confiscate a malicious miner’s equipment or ban them from the network.

Reaching a Consensus

No system is inherently perfect, so the proof-of-stake and proof-of-work methods have many advantages and disadvantages. Now that you understand how these consensus mechanisms operate, choosing the best based on your priorities is up to you.

If neither system appeals to you, it’s best to wait and see what the future holds. While both mechanisms outlined in this article will probably be present for a long time, this doesn’t mean they won’t get any trustworthy competition. After all, developers are constantly coming up with new methods to verify transactions and achieve a consensus on a blockchain.