Although cryptocurrencies are popular digital assets, what is more interesting is the technology behind the security of cryptocurrency transactions. There are two main consensus mechanisms that are used for this purpose. Proof of work and forensics. Both mechanisms rely on the key factor of ensuring that transactions added to the crypto ecosystem are valid and that there is no room for fraudulent activity.
The question, or we might say a hot topic, is who will be the winner in the battle between proof of work and proof of stake?
What Is the Difference Between Proof-of-Work and Proof-of-Stake?
Cryptocurrencies are based on blockchain, which is a decentralized ledger technology.
Unlike the banking system, where control of all deposits and account holder data is vested in a central body that processes transactions, cryptocurrencies have no body that manages their network. Control and responsibility for processing transactions are distributed among the nodes (computers) of the computer network. They validate new transactions and add them to the system as a new block of data.
Some cryptocurrency systems, such as Bitcoin, use proof-of-work for this validation process, while Ether 2.0 and Cardano use proof-of-stake mechanisms.
Now let’s try to understand them one by one.
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Going back to the topic…
In a proof of work, network nodes, also known as miners, solve complex mathematical puzzles to validate transactions and add a block to the blockchain. In return, they are rewarded with cryptocurrencies. Several miners compete for the chance to add blocks; whoever solves the puzzle first gets the chance.
Therefore, we can say that this consensus mechanism consumes a lot of energy and resources. Read the proof of work in detail here.
In proof of stake, transactions are verified not by solving a mathematical puzzle, but by betting one’s cryptocurrency on the network. In proof of stake, instead of verifiers competing against each other, they enter their numbers and an algorithm randomly selects a verifier. The more cryptographic data you enter, the greater the chance of being selected.
Because there is no puzzle to solve and no competition, relatively few resources are used compared to proof of stake. This makes PoS more energy efficient. To learn more about proof of stake, click here.
PoW vs. PoS: Which Consensus Mechanism Is Better?
While PoW and PoS both intend to secure the transactions added to the blockchain system, they come with their list of pros and cons.
Pros and cons of PoW
Let’s first look at the advantages and disadvantages of the proof-of-work consensus mechanism.
PoW is a proven mechanism for securing transactions. Many of the major cryptocurrency systems, such as Bitcoin and Ether, use Proof of Work, which over the years has proven to be the most secure way to handle transactions on the blockchain.
With many competing nodes, it is difficult to falsely validate a transaction on a network with PoW.
2. Attractive rewards for successful miners
Se un miner riesce ad aggiungere blocchi alla blockchain, viene ricompensato con alcune criptovalute, oltre a una commissione di transazione. Ad esempio, i minatori guadagnano attualmente 6,25 BTC per blocco aggiunto.
1. Higher energy usage
This is one of the main problems with proof-of-work mechanisms. For example, Bitcoin consumes more electricity than countries such as the Philippines, Finland and Belgium. This raises concerns about its long-term viability and sustainability.
2. Higher expenses
Installing the equipment needed to validate and add blocks is expensive. Ordinary computers cannot solve cryptographic equations, so miners must install special tools for this purpose. In addition, to cope with competition, these computers must run continuously, which increases the cost of electricity. Overall, the whole process is expensive.
Pros and cons of PoS
1. Energy and resource efficiency
Compared with PoW, the PoS consensus mechanism consumes less energy and is more efficient. Unlike proof of work, in PoS the algorithm decides who will be the verifier and eliminates arguments. As a result, there is no need to continuously burn resources to win the race of who will validate a block first. Also, there is no need to install special equipment to prove the bet. You can validate transactions even with an ordinary laptop computer. The software is also very convenient for verifiers.
2. Easy to enter the space
Proof of Stake makes mining very easy and convenient for verifiers. They do not need to install heavy equipment, and their investment consists mainly of buying more and more tokens to bet on. This encourages and enables more participants to participate and receive prizes. Mining through proof of stake is much simpler than proof of work.
1. Yet to be effective on a larger scale
Ether 2.0 and Cardano are two popular examples of proof-of-stake. However, Ether has not yet transitioned to PoS and Cardano is still a relatively small network. Although Bitcoin has been using PoW since then, PoS has not yet proven to be a better solution for larger networks.
2. Prone to security breaches
Proof of stake opens the door to new participants with a low barrier to entry. However, in terms of security, it is no match for proof of work, as this consensus mechanism has been common since the invention of Bitcoin.
3. Manipulation by leading token holders
In PoS, validators with higher stakes are more likely to be selected. Thus, when verifiers with large pockets purchase more chips, they take full control of the system.
When Should PoS or PoW Be Used?
Which one to use for proof-of-work and which one for proof-of-interest depends on the needs of the network. Both consensus mechanisms, while ensuring the security of the whole system, are different.
In Proof of Work and Proof of Participation, PoW is used when the main task is to prevent fraudulent activities and increase the trust factor. PoW makes it virtually impossible to tamper with data during and after additions. The threat of malicious activity is greatly reduced.
At the same time, however, PoW takes about 10-60 minutes to complete and validate a transaction. Therefore, if faster transactions are needed, a proof-of-stake mechanism is a good solution. PoW is relatively secure, but PoS is also a secure framework because the verifier owns most of the tokens in the network, so it is in its best interest to protect the system.
1. Will proof-of-stake replace proof-of-work?
So far, there is no substitute for either of these mechanisms. Proof of work helps prioritize transaction security, while proof of interest ensures faster transaction times. There are many differences between these mechanisms, and both can be widely used in the long run.
2. Why is proof-of-work more secure than proof-of-stake?
In proof of work, the transaction validation process is a competition between miners that takes place continuously until a block is added. There is no bias in the process: whoever solves the mathematical equation first becomes the winner and is rewarded. And in proof-of-stake, the verifier with the highest stake has a better chance of being selected and rewarded. Compared with PoW, PoS has a lower barrier to entry and requires less cost and resources. As a result, anyone can enter at any time, making the system vulnerable to fraudulent activities.
3. Is ETH proof-of-work or stake?
The Ethernet network is based on a proof-of-work algorithm; however, it will soon undergo an upgrade to a proof-of-stake algorithm in order to improve scalability. This could happen in September 2022.
4. Is Bitcoin Cash proof of work or stake?
Bitcoin Cash, like Bitcoin, is based on proof of work. It is a fork of the original Bitcoin network, created when the community failed to reach consensus on increasing the block size of the original Bitcoin network.