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Home Guide & Reviews

Proof of Work VS Proof of Stake: How Do They Compare?

Aman Chaudhary by Aman Chaudhary
April 24, 2022
in Guide & Reviews
Proof of Work VS Proof of Stake

Are you curious about the Proof of Work vs Proof of Stake debate? Or perhaps you’d want to learn more about how to mine Ethereum or Bitcoin that employs Proof of Work. In any case, you’ve come to the right place.

Both methods are ‘consensus mechanisms’. They confirm transactions on a blockchain without the need for a third party. We’ll go into this further later.

Anyway, in this Proof of Work vs Proof of Stake tutorial, I’ll start by outlining the fundamentals of each model. Then we will discuss which major blockchains use them. Following that, I’ll offer a very basic explanation of how the technology works and how it allows users to earn more money by becoming miners!

Finally, I’ll explain why I feel Proof of Stake is a far superior paradigm to Proof of Work, as well as provide some real-world instances of each. By the conclusion of this course, you’ll be able to explain to your friends what each consensus mechanism is, how they function, and which one is superior.

So, what are you holding out for? Let’s start with the fundamentals.

Proof of Work VS Proof of Stake: The Fundamentals

When Satoshi Nakamoto was developing Bitcoin, the first cryptocurrency, he needed to create a means for transactions to be validated without the help of a third party. This he accomplished by developing the Proof of Work method.

Proof of Work is essentially used to determine how the blockchain achieves consensus. In other words, how can the network be certain that the transaction is genuine and that no one is attempting to commit fraud by spending the same cash twice?

Although I will go into further depth later, Proof of Work is based on sophisticated mathematics known as ‘cryptography.’ So, we refer to digital currencies such as Bitcoin and Ethereum, like cryptocurrencies. 

Cryptography employs mathematical equations that are so complex to solve that only powerful computers can do it. Because no two equations are ever the same, once solved, the network knows that the transaction is genuine.

Many other blockchains have duplicated the original Bitcoin code and, as a result, adopt the Proof of Work paradigm. Although Proof of Work is a fantastic innovation, it is far from flawless. It not only consumes a lot of power, but it also has a very restricted number of transactions it can handle at the same time.

As a result, new consensus techniques have emerged, with the Proof of Stake model being one of the most prominent. Scott Nadal and Sunny King, two developers, invented Proof of Stake in 2012. At the time of its introduction, the inventors claimed that Bitcoin and its Proof of Work mechanism needed $150,000 in daily electricity expenditures.

This sum has since risen to millions of dollars, which I shall cover in further detail later in this essay.

Peercoin was the first blockchain project to adopt the Proof of Stake mechanism. The early advantages include a more fair mining system, more scalable transactions, and less need for power.

As a result, Ethereum, the world’s second most popular cryptocurrency, is aiming to transition from Proof of Work to Proof of Stake. The Ethereum Proof of Stake date has yet to be established, but the team works tirelessly to get there as soon as workable.

So, now that you understand the fundamentals, the next section of my ‘Proof of Work VS Proof of Stake’ tutorial will look at which blockchains have implemented each of the two models!

Adoption of Proof of Work VS Proof of Stake

The most apparent place to start is with the Bitcoin blockchain, which was the first to use Proof of Work. With PoW, a transaction takes around 10 minutes for the network to confirm. Furthermore, the Bitcoin blockchain has a transaction rate of just roughly 7 transactions per second.

As a result, transaction costs have soared since the project’s inception in 2009. For example, Bitcoin costs were initially a fraction of a penny, making the network suitable for transmitting tiny sums. However, as seen in the table below, during its busiest time in December 2017, this soared to as high as $40 per transaction.

Although these costs are low now, they remain too costly to be considered a worldwide payment system. The limitations of Proof of Work cause most of these challenges.

Ethereum, the world’s second most popular cryptocurrency, also employs Proof of Work. The engineers made a few tweaks to the original algorithm, allowing the network to process transactions in as little as 16 seconds. Although not the quickest in the business, it is much faster than Bitcoin’s 10 minutes.

Nonetheless, the scalability concerns that Proof of Work has brought Bitcoin are a problem for Ethereum as well. The Ethereum blockchain can execute a maximum of 15 transactions per second, which is far less than what the network requires. Although the Ethereum PoS date is still unknown, we hope it will boost this amount to thousands per second.

Other blockchains, like Ethereum, employ a version of Proof of Work by modifying the type of algorithm that supports the transaction validation process. Bitcoin Cash and Litecoin are two more popular blockchains that have implemented Proof of Work.

Proof of Stake is presently used by some of the most prominent cryptocurrencies. Dash is one of them, allowing users to send and receive payments in a matter of seconds.

NEO is another well-known blockchain that employs the Proof of Stake method. The Chinese smart contract technology has had an incredible journey since its inception in 2016, raising the value of its coin by over 100,000%!

So, now that you’ve learned which major blockchains use Proof of Work and which use Proof of Stake, the next section of my ‘Proof of Work VS Proof of Stake’ tutorial will look at how they confirm transactions. Let us begin with Proof of Work!

Proof of Work: How are Transactions Verified?

The proof-of-work concept is a system for confirming and recording bitcoin transactions.

Every cryptocurrency has a blockchain, which is a public ledger comprising transaction blocks. Each block of transactions in a proof-of-work cryptocurrency has a unique hash. To confirm the block, a crypto miner must create a target hash that is less than or equal to the block’s hash.

Miners do this by employing mining machines that generate calculations fast. The goal is to be the first miner to reach the desired hash since that miner will be the one to update the blockchain and get crypto rewards.

Because getting the target hash is tough, but confirming it isn’t, proof of work works effectively with cryptocurrencies. The technique is difficult enough to prevent transaction records from being manipulated. Simultaneously, after discovering a target hash, it is simple for other miners to verify it.

Anyway, now that you know how mining Ethereum, Bitcoin, and other Proof of Function blockchains work, the next section of my ‘Proof of Work VS Proof of Stake’ article will explain how Proof of Stake works.

Proof of Stake: How are Transactions Verified?

The proof-of-stake concept allows cryptocurrency owners to stake coins and set up their validator nodes. Staking is the act of pledging your coins to be used for transaction verification. When you stake your coins, the platform locks them. But you can unstake them if you wish to swap them.

When a block of transactions is ready for processing, the cryptocurrency’s proof-of-stake mechanism selects a validator node to evaluate it. The validator verifies that the transactions on the block are correct. If this is the case, they upload the block to the blockchain and collect cryptocurrency incentives for their efforts. If a validator suggests adding a block with incorrect information, they will lose some of their staked holdings as a punishment.

Let’s look at how this works with Cardano, a popular cryptocurrency that employs proof of stake.

Anyone who possesses Cardano can stake it and create their validator node. When Cardano wants to validate transaction blocks, its Ouroboros protocol chooses a validator. The validator validates the block, adds it, and gets additional Cardano for their efforts.

Now that you understand how each consensus method verifies and validates transactions, the following section of my Proof of Work VS Proof of Stake guide will explain why I feel the Proof of Stake model is far superior to Proof of Work.

Why is Proof of Stake better than Proof of Work?

I feel that the Proof of Stake model is superior to the Proof of Work model because it addresses several difficulties, which I will now discuss.

1. Centralization

If you’ve followed my Proof of Work vs. Proof of Stake guide up to this point, you’ll recall that I stated that Proof of Work blockchains allow those who buy strong hardware devices a better chance of winning the mining payout. As a result, centralized enterprises have purchased hundreds of machines with the maximum mining power. A mining pool is a term used to describe this sort of activity. It enables participants to “pool” their resources to have the best chance of solving the cryptographic sum first.

As a result, only four mining pools control more than half of the entire Bitcoin mining capacity.

This is an unjust system since it ensures that the typical individual will never win the mining prize. Proof of stake differs. This paradigm prevents groups of individuals from banding together to dominate the network only for the sake of profit. Those that contribute to the network by freezing their coins get a reward accordingly.

The following example in this ‘Proof of Work VS Proof of Stake’ guide will look at power use.

2. Consumption of electricity

I highlighted in my Proof of Work vs. Proof of Stake tutorial that some Proof of Work blockchains, such as Bitcoin, consume a lot of power. This is because of the extremely challenging cryptographic sum that miners must solve. According to recent research, the total amount of power necessary to keep the Bitcoin network operational is greater than that used by over 159 individual nations!

This is not only terrible for the environment but also lowers the rate at which cryptocurrencies may gain real-world acceptance. This is because we must pay power bills in fiat money.

Proof of Stake does not require very complicated sums to be solved, so the power costs to verify transactions are significantly cheaper.

3. 51% Attack

A 51 percent assault is the unpleasant circumstance in which a group or a single person gets more than half of the overall mining power. If this occurred on a Proof of Work blockchain, such as Bitcoin, the individual could change a specific block. If this individual were a criminal, they could change the barrier to their advantage.

A recent instance of a 51 percent assault occurred on the Verge blockchain. The hacker could escape with 35 million XVG coins. This amounted to $1.75 million at the time of the attack!

It would be impractical to conduct a 51% assault while employing a Proof of Stake consensus process. To do this, a hacker would need to stake at least 51% of the entire quantity of bitcoin in circulation. They could only achieve this by purchasing the coins in the open market.

If they opted to spend this much money, the coin’s real-world worth would rise along with it. As a result, they’d wind up paying far more than they’d earn from the attack. Not only that, but the bad actor would lose all of their stakes once the rest of the network understood what had happened.

The Verdict on Proof of Work vs. Proof of Stake

That concludes my Proof of Work vs. Proof of Stake tutorial! If you read it from beginning to end, you should now have a clear knowledge of how each consensus mechanism works and how they vary.

Proof of Work is the current mining method for Ethereum, Bitcoin, Dash, and other cryptocurrencies. However, you should now completely know the several concerns surrounding Proof of Work. This covers the amount of electricity needed, the centralized power that mining pools now have, and the possibility of a 51 percent attack.

I’ve also included a summary of some solutions that the Proof of Stake method provides to the bitcoin sector. However, as blockchain technology advances, a slew of new consensus algorithms enter the market, each with its own set of advantages and disadvantages.

Also read: What are The Risks of Leaving Cryptocurrency in Exchange?

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