What is Proof of Work and Proof of Stake?

As the cryptocurrency industry continues to grow and evolve, so do the ways new coins are created. In the early days of Bitcoin, mining was performed by individuals using their own personal computers to verify transactions on the blockchain. This process, known as “Proof of Work,” is still used by many cryptocurrencies today. However, an alternative method known as “Proof of Stake” has become increasingly popular in recent years. So, what’s the difference between these two methods? Let’s take a closer look.

Proof of Work

Operating a blockchain is based on the concept of processing cryptocurrency transactions. These transactions are bundled into blocks, which once processed are added to the network’s ever-growing chain of data blocks, hence the term “blockchain.” In order to add a new block to a blockchain, miners need to solve a complex mathematical problem, which is now often done with highly specialized and powerful computing equipment.

This problem is known as proof of work, and it requires a significant amount of computing power to solve. With proof of work, miners are rewarded for adding new blocks to the blockchain. The reward received is proportional to the amount of work done, meaning that the more blocks you add, the more you are rewarded. This system incentivizes miners to continue adding new blocks to the blockchain, as they will receive a financial reward for doing so. 

The benefits of proof of work stem from its reputation as the basis of the Bitcoin blockchain. In a proof of work system, each node in the network must put in work in order to validate transactions. This makes it much more difficult for bad actors to flood the network with fake transactions, making proof of work a reputable protocol with an emphasis on decentralization.

It is important to know that Proof of Work does carry a major drawback: it consumes a lot of energy. In fact, it is estimated that Bitcoin mining alone consumes more electricity than in some small countries! Overall, proof of work is an intriguing protocol with a solid track record and reputation of success, especially with Bitcoin!

 

What are cryptocurrencies

Proof of Stake

Proof of stake is an alternative method for creating new cryptocurrency coins. Rather than rewards being given out based on the amount of work done, they are instead distributed based on how many coins a miner owns. For example, if a miner owns 1% of all tokens in existence, they will be able to mine 1% of all new blocks that are added to the blockchain. 

Fun Fact: Ethereum, formally a proof of work network, transitioned to proof of stake in an event known as The Merge. The broadly used network now operates solely under proof of stake.

Proof of stake has a variety of notable differences compared to proof of work. Perhaps most notably, it requires far less energy to run; estimates suggest that a proof of stake system uses around 99% less energy than a proof of work system like Bitcoin! Additionally, it is also much more difficult for miners to attack as they would need to control at least 51% of all tokens in existence to have control. 

The protocol does, however, carry a weakness. One of the biggest negatives about proof of stake is that it can be very expensive to set up. In order to have a chance of earning rewards, you need to have a large amount of money staked. This can make it difficult for small investors to get involved. Overall, proof of stake’s focus on efficiency through a token-ownership-backed processing system makes it an exciting and innovative protocol.

Conclusion

So there you have it! A brief explanation of the differences between proof of work and Proof or Stake. It is clear that both systems carry their individual pros and cons, making the question of which one is better difficult to answer. As the cryptocurrency industry continues to grow and evolve, it will be interesting to see which method becomes more popular.