There are two major consensus mechanisms that have been put in place in the cryptocurrency trading network to ensure that every transaction is well documented to avoid repetition; they are “Proof of Work” and “Proof of Stake.”
These mechanisms are used to verify new transactions, add them to the blockchain and create new tokens. Most of the oldest cryptocurrencies like Bitcoin and Ethereum, use PoW because it is the oldest consensus algorithm.
The Ethereum blockchain announced a recent plan to change over to PoS. Why the sudden talk about the transition? What makes PoS better? Let’s discuss these questions in this article.
What Is Blockchain Consensus?
Blockchain functions solely on decentralization and immutable record. These are the special characters that give blockchain its uniqueness and are why blockchain is sometimes referred to as a “distributed ledger network” (DLT). A consensus mechanism, such as PoW and PoS, is needed to prevent fraudulent activities and errors like “double-spend” which means spending the same cryptocurrency twice.
What Is Proof of Stake?
According to the PoS, a person is only allowed to mine or validate a block transaction in equilibrium with the number of coins they possess in holding. The PoS was created in 2012 by Scott Nadal and Sunny King after being faced with the challenges surrounding Bitcoin’s PoW.
How Does PoS Work to Validate Cryptocurrency Transactions?
A set of nodes called stakers decides to stake their own cryptocurrencies for transaction validation. The larger the stake and longer the duration, the better the chances of the staker getting a transaction validation.
PoS functions on the currency power where it depends on the number of cryptocurrencies in a wallet. This number of tokens is how much stake you have which will influence the validation of a transaction. The Ethereum network is looking to solve its scalability issue by creating its own PoS protocol called Casper.
One distinct feature of PoS is that there won’t be any miners in this proposed PoS system. Rather, the miners will be replaced by validators or forgers. This will result in the cancellation of block rewards leaving only transaction fees. In addition, there won’t be any mining of new coins leaving the number of coins in circulation the same.
Advantages and Disadvantages of PoS
Advantages Of PoS
- Proof of Stake (PoS) is less risky because it provides a structure that is less favourable to potential miners who are thinking of attacking the network.
- Proof of Stake doesn’t require the use of powerful computers and large amounts of energy for its operation.
- PoS is more scalable. It provides faster transaction routes for processing transactions by making it more decentralized and allowing the participation of more individuals and groups.
Disadvantages Of PoS
- PoS based blockchain has barriers that make it not readily available.
- It is vulnerable to attacks known as 51%attacks.
- The staking rewards are not as much as that of mining.
What Is Proof of Work?
PoW is a consensus mechanism that requires nodes on a network to provide evidence that they have expended computational power (i.e., work). This process achieves consensus in a decentralized manner and is used to prevent others from overtaking the network.
How Does PoW Validate Cryptocurrency Transactions?
Proof of work is the first-ever crypto consensus mechanism, first used by Bitcoin. Proof of work and mining are similar in their mode of operation. The PoW network requires a huge amount of processing power. PoW blockchains are secured and verified by virtual miners around the world competing to solve a math puzzle. The maths puzzle involves iterations of SHA-256 hashing algorithms. Due to its mode of operation, everybody is incentivized on the network to act honestly because it only records true transactions.
Advantages and Disadvantages of Proof of Work
Advantages Of PoW
- A robust way of maintaining a secure decentralized blockchain.
- It incentivizes more miners to join the network, which increases its power and security.
- It is hard for any individual or group to try to hack a valuable cryptocurrency’s blockchain because of the power consumption it will demand.
Disadvantages of PoW
- The huge power requirement has effects on the planet because of its release of harmful gases into the environment.
- The powerful computers that are used for mining in PoW are very expensive.
- PoW consequently favours individuals or organizations with better equipment.
- It has poor scalability to accommodate the vast number of transactions.
Proof of Work vs Proof of Stake
- In Proof of Work, its participating nodes are called miners while that of Proof of Stake are called validators or forgers.
- Mining capacity depends on computational power in PoW while in PoS, its validating capacity depends on the stake in the network.
- In PoW, mining produces new coins while new coins are formed in PoS.
- Miners receive block rewards in PoW while validators receive transaction fees in PoS.
- In Proof of Work, there is massive energy consumption while in Proof of Stake, there is low to moderate energy consumption.
PoW is significantly more prone to 51% attacks while in PoS, 51% attacks are virtually impossible.