PoW vs. PoS: Definitions and Key Differences
Gain an understanding of what PoW and PoS consensus mechanisms are and how they differ from one another.
Have you heard about PoW (Proof-of-Work) and PoS (Proof-of-Stake) consensus mechanisms? Every experienced crypto investor knows that the first one is used in Bitcoin. However, many projects give their preference to another consensus mechanism, PoS, as part of their development roadmap.
What are PoW and PoS? How do they work? What are the key differences between the mechanisms? If you’d like to get the answers to all of those questions, this article will tell you what you need to know.
Let’s dive in!
What is PoW (Proof-of-Work)?
Proof-of-Work is a consensus mechanism that was founded by Satoshi Nakamoto in 2008. This mechanism is used in the Bitcoin network, as well as in many other crypto networks with the aim of eliminating double-spending.
PoW determines how the Bitcoin blockchain achieves distributed consensus – it’s used to confirm Peer-to-Peer (P2P) transactions without trust and without the need for third-party intermediaries.
In a Proof-of-Work consensus network, such as the Bitcoin network, transactions are confirmed by miners – participants who use a vast amount of resources to ensure the network operates properly and securely.
In addition, miners have other crucial tasks such as creating and validating transaction blocks. However, to fight for the right to validate blocks, miners need to use special mining equipment that is able to meet all the high-level, mathematical challenges.
The first miner who solves such a mathematical challenge is allowed to add their block to the blockchain and receive a reward – cryptocurrency units created and transaction fees. The size of the reward differs from network to network.
For example, in the Bitcoin blockchain (as of December 2021), a miner received 6.25 BTC and a commission as a reward per block. The amount of new BTC generated with each valid block is reduced by 50% every 210,000 blocks (approximately every four years) according to a built-in mechanism known as halving.
What is PoS (Proof-of-Stake)?
Proof-of-Stake is the second most popular consensus algorithm, created in 2011 as an alternative to PoW. PoS’s main aim is to overcome the scalability limitations of Proof-of-Work networks.
While PoW and PoS have a common purpose – to reach a consensus in the blockchain – PoS realizes a different way to identify the participants who verify transaction blocks. Considering the PoS algorithm’s rules, a participant’s priority depends not on their processing power, but on the amount of cryptocurrency they own.
To be considered for blockchain verification, participants need to stash a certain number of coins in a particular blockchain smart contract. This process is actually known as staking. The PoS protocol can then choose a participant to validate the next block.
Depending on the network, the selection may be random or according to the amount of cryptocurrency being staked. As a reward, the participant receives a transaction fee from the block that is validated. As a rule, the more coins they stash, the higher their chance of being chosen.
Where are they used?
As we’ve already noted, PoW and PoS mechanisms are required to check and confirm transactions, as well as solve several real-world problems.
Apart from Bitcoin, many other well-known cryptocurrencies use the Proof-of-Work algorithm such as Litecoin, Dash, and Dogecoin, with multiple additional upgrades like smaller block time (which makes the transactions faster) or privacy features.
If we speak about the Proof-of-Stake consensus, it’s also used by many major projects, such as EOS and Tron (they use less decentralized versions of PoS), as well as Binance Smart Chain, which uses Proof-of-Stake authority.
Currently, more and more projects including market giant, Ethereum, give their preference to PoS.
Even though PoW and PoS are both consensus mechanisms that aim to provide security for the blockchain, there are some significant differences between them. To get a full understanding, let’s have a look at our small comparison table:
|Proof-of-Work (PoW)||Proof-of-Stake (PoS)|
|Who can mine/validate blocks?||The more processing power, the higher the chance of mining a block.||The more coins are staked, the higher the probability of validating a new block.|
|How does a block get mined/validated?||Miners solve complex mathematical problems using computational resources.||Usually, the algorithm determines the winner randomly based on the number of coins staked.|
|Mining equipment||Professional mining equipment: ASICs, CPUs, and GPUs.||Any computers and mobile devices with Internet access.|
|How are the rewards distributed?||The first participant who managed to mine a block receives a block reward.||Validators receive a part of the transaction fees, collected from the validated block.|
|How the network’s security is ensured||The bigger the hash, the safer the network.||While staking, cryptocurrency is locked in the blockchain to protect the network.|
Both Proof-of-Work and Proof-of-Stake consensus play quite an important role in the crypto ecosystem. PoW can be criticized for its high carbon emissions. On the other hand, it’s considered a truly reliable algorithm to secure the blockchain network.
However, Ethereum, one of the most well-known platforms worldwide, has changed the way it operates and is running on the Proof-of-Stake consensus model. PoS is easily becoming one of the top solutions for current and future projects.
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Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.