Intermediate Series

Proof-of-Work (PoW) vs Proof-of-Stake (PoS)

Proof-of-stake and proof-of-work are consensus mechanisms that empower strangers from all over the world to work together building a new financial system. But how are they different? And more importantly, which is better?

Learning the difference between proof-of-work and proof-of-stake will help you better evaluate the cryptocurrencies in your portfolio, as they’re a key difference between blockchains like bitcoin and Ethereum 2.0. For example, proof-of-stake cryptocurrencies like Ethereum 2.0 can come with the benefit of staking your crypto and earning extra income. 

In this article, we examine both proof-of-work and proof-of-stake. However, to truly understand these systems, we must first understand the concept of consensus mechanisms — the process for a decentralised network to agree on a single source of truth.

Contents

  • Overview: Proof-of-work vs proof-of-stake
  • Firstly, what’s a consensus mechanism?
  • What is proof-of-work (PoW)?
  • What is proof-of-stake (PoS)?
  • Is proof-of-work or proof-of-stake better?

Firstly, what’s a consensus mechanism?

In centralised computer systems like those used by banks, there is a single source of truth. Banks record every single transaction on our behalf, updating a ‘datasheet’ that says who has an account and how much money they have in it. They are a single controlling entity with complete power over our finances. Essentially, we need their permission to send money to a friend or pay our bills. 

In contrast, a decentralised system like Bitcoin doesn’t have a single controlling authority. It’s a network of cooperative participants that anyone can join and access. This begs the question; if anyone can join, then how do they determine who owns what bitcoin? Well, this is where the consensus mechanism comes into play. 

A consensus mechanism is the process for a decentralised network to agree on a single source of truth, such as who owns what bitcoin. Moreover, this mechanism protects the network from hackers and spammers as well as issuing new coins. It’s what lets hundreds of millions of complete strangers operate on a shared financial system without having to trust a single controlling entity. 

Every single cryptocurrency is a decentralised network, so they all need a consensus mechanism to determine who owns the coins. They create a single source of truth so that everyone from Melbourne to Mozambique can agree exactly how much of the cryptocurrency everyone in the network owns. 

The two most popular consensus mechanisms are proof-of-work and proof-of-stake, which we’ll now explore. 

What is proof-of-work (PoW)?

Proof-of-work was the very first consensus mechanism for cryptocurrencies, used by Bitcoin back in 2008. It’s currently the most popular consensus mechanism and secures over a trillion dollars’ worth of cryptocurrencies. 

Proof-of-work gets its name from the computing power used to secure the network — the ‘work’. Specifically, ‘proofs of work’ are mathematical puzzles that miners compete to solve first. As you know, ‘miners’ are the computers that solve these puzzles. The miner who solves this puzzle first gets to add a list of new transactions, known as a block, to the blockchain. As a reward, they receive some of the cryptocurrency. 

Here’s a quick overview of the proof-of-work process for the Bitcoin network:

  1. Miners build a list of transactions that need to be validated, such as Helen sending 3 bitcoins to Adam. This list is known as a block. 
  2. Miners then try to solve the mathematical puzzle and guess the answer. If they’re successful, they get to add their block to the blockchain. 
  3. The miner broadcasts this block to the rest of the network, with verification that they solved the puzzle. 
  4. Other miners confirm the accuracy of the block and also add it to the blockchain. This process represents the consensus, as all of the network now agrees on a single version of the truth. 
  5. The miner who solved the puzzle receives a block reward of freshly minted bitcoin. 
  6. This process then repeats so the next block can be added to the network. 

Advantages of proof-of-work:

  • Historically superior security
  • Meaningful decentralisation
  • Deters malicious actors

Disadvantages of proof-of-work:

  • Limited speed and scalability
  • Energy intensive
  • Requires specialised computers

What is proof-of-stake (PoS)?

Proof-of-stake is the second most popular consensus mechanism and it’s designed to overcome some of the limitations of proof-of-work, especially speed and scalability. Popular proof-of-stake blockchains include Polkadot, Cardano and Ethereum as soon as it upgrades to Ethereum 2.0.

The real difference between proof-of-work and proof-of-stake is how the new blocks are created. While proof-of-work mechanisms miners must compete to solve a block, in proof-of-stake networks, a validator is chosen at random to add a new block. Instead of miners, validator nodes are responsible for creating new blocks. 

Here’s a quick overview of the proof-of-stake process for validating Ethereum’s blocks:

  1. To become eligible as a validator node on Ethereum, you must stake at least 32 Ether. This stake is a form of collateral, which can be slashed if the validator is dishonest.
  2. When a new block needs to be added, the system selects a validator node at random. 
  3. The validator then compiles a list of transactions and submits the new block to the network.
  4. Other validators then attest that they have seen this block and it’s accurate. 
  5. When a sufficient number of attestations are given, the block is added to the blockchain. 
  6. Both the validator that created the block and the validators that attested to its accuracy receive rewards of Ether, taken from transaction fees. 

Advantages of proof-of-stake:

  • Energy efficient
  • Easily scalable
  • Fast and efficient
  • Suitable for smart contracts and decentralised apps

Disadvantages of proof-of-stake:

  • Potential for increased centralisation over time
  • Staked coins are locked for a period of time 
  • Less proven security than proof-of-work

Is proof-of-work or proof-of-stake better?

Both proof-of-work and proof-of-stake cryptocurrency have different advantages. At the moment, proof-of-work coins are leading the store of value space, while proof-of-stake blockchains are superior to build smart contracts on. Over time, it’s expected that both types of blockchains excel in the crypto space. 

Popular proof-of-work cryptocurrencies to invest in:

Popular proof-of-stake cryptocurrencies to invest in: 

You can invest in a proof-of-work or proof-of-stake network by purchasing their cryptocurrency through an online exchange like Cointree. 

Overview: Proof-of-work vs proof-of-stake

Proof-of-work:

  • Popular cryptocurrencies include: bitcoin, Bitcoin Cash, Litecoin
  • Rewards go to: Miners
  • Energy usage: Higher
  • Speed: Slower
  • Scalability: Limited
  • Security: Proven history

Proof-of-stake:

  • Popular cryptocurrencies include: Ethereum 2.0, Cardano, Polkadot
  • Rewards go to: Stakers
  • Energy usage: Lower
  • Speed: Faster
  • Scalability: High
  • Security: Less proven