POW VS POS

29/7/2022

PROOF OF WORK (POW) VS PROOF OF STAKE (POS)

Proof of work is anytime when you do a transfer of Bitcoin, you are connected to a Bitcoin Miner and the transfer is updated across the entire network. Crypto mining is how the Bitcoin network verifies their transactions, instead of relying on one central bank computer to process transaction through one central balance sheet where they hold all the control, and all the power. The blockchain creates a network of thousands of computers connected together. They’re on the same network, and they all verify the same copy of the same balance sheet. This balance sheet is called the “Ledger”, and these computers compete against each other solving math equations as fast as possible. Because the first one who solve the next math equation wins the next page of the ledger. This page is called a “Block” and that is why we called it the blockchain, because all the pages are chained together in the balance sheet. When one of the computers finally solves the next equation, they earn a reward, which will be a bit of free Bitcoin or whatever coin they are mining on that network.

In Proof of work network, the consensus mechanism makes it higher level of security as it makes it more difficult and costly to attack and it often results in more decentralized network and it is relatively easy to implement. Proof of work requires significant computational power, and therefore, it leads to high energy consumption, it increased costs, and environmental impacts. Proof of work need specialized equipment, which can prove to be costly and need a big investment to start.

Proof of stake is similar to proof of work both are used to attain consensus and keep the underlying blockchain secure. But there is one important difference, proof of stake requires less work to validate data blocks and requires less energy. In proof of stake there is no race against the nodes to validate a transaction instead they now take part in a lucky draw whose winner is decided by the blockchain itself. To volunteer in this lucky draw you have to stake some of your cryptocurrency into a storage, if you cheat you are penalized and some of your staked coin are taken away by the entity that spots the fraud. In fact, to keep the lucky draw fair the more crypto you stake the higher your chances of getting picked as a winner. Each cryptocurrency that uses the proof of stake algorithm has its own set of rules and procedures to create the best possible combination for their respective ecosystem. Since it does not require the computational power involved in Proof of Work models, Proof of stake is more energy efficient given that it is not based on computing power, it doesn’t require specialized equipment, so more people can participate in running a Proof of stake node. The more people participate, the higher the network’s level of decentralization and resistance 51% attacks, it ensures superior scalability and higher transaction speeds. The main drawback of Proof of Stake is once the coins are staked, they are locked and thus cannot be sold until the stipulated staking period has elapsed. In Proof of Stake models that select nodes based on the size of their stake, those who hold a large amount of coins are favoured.

Each of the two consensus mechanisms comes with advantage and disadvantages, and choosing one over the other depends on the needs of a network. For example, Proof of Work is required by networks that focus on preventing fraud, building trust and ensuring high security. On the other hand, Proof of Stake is largely utilized by networks that require high transaction speed.