Proof-of-work and proof-of-stake are two of the most popular crypto mining mechanisms, but what makes them different?
At its most basic form, proof-of-work and proof-of-stake are two methods for mining cryptocurrency. In more technical terms, proof-of-work and proof-of-stake are two forms of consensus mechanisms designed to address the issue of trust between blockchain network participants. The controversy over proof-of-work vs. proof-of-stake may seem technical at first glance, but it represents fundamental differences in how cryptocurrency networks achieve their goals.
The fight between the two algorithms raises important issues such as network stability, environmental protection, entry barriers, and decentralization. This central concept is reflected in the word “trustless” used to describe blockchain networks: the purpose of a blockchain framework is to ensure that transactions are implemented and registered as planned without the need for social trust or an intermediary.
To make this possible, the network must be structured in such a way that it is unlikely or at the very least, extremely unviable for users to double-spend cryptocurrency units or roll back previous transactions.
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What Is Proof Of Work?
Proof-of-work is a revolutionary scheme that existed before Bitcoin (BTC), but has since been inextricably linked to the world-famous cryptocurrency. As a result, the process is often referred to as the Nakamoto Consensus, after the coin’s still-unknown inventor’s nickname.
The “longest-chain-wins” rule represents majority decision (consensus) in proof-of-work. This means that the blockchain network’s participants consider the longest chain of blocks as the only one that is true. The rule prohibits several chains from occurring side by side, each representing a different version of history.
The more time the consensus version of the blockchain exists, the more computational power and resources are needed to revert it. Adding new blocks to the chain is intended to be complicated, that is, both expensive and time-consuming.
In order for the longest chain rule to work securely, network participants compete to solve complex cryptographic puzzles to be the first to validate each new block on the network. This method is referred to as “mining” metaphorically.
Before a proof-of-work problem can be solved, it must be tried several times, consuming significant computational resources (“work”). As Sam Beckett would say, it’s just a matter of trying again, failing again, and failing better.
“The longest chain not only serves as evidence of the sequence of events observed, but also proof that it originated from the largest pool of CPU power,” Satoshi Nakamoto stated in the Bitcoin Whitepaper.
We may deduce from this theory that maintaining proof-of-work systems necessitates a large amount of computational power.
Bitcoin Network Expands With Proof Of Work
As the Bitcoin network expands, advocates for inclusivity and decentralization argue that mining has become the near-exclusive domain of those with the financial resources to stay competitive by investing in the most sophisticated and efficient hardware.
Another important consequence of compute-intensity is that the hardware needed to mine the Bitcoin network consumes enough energy to power small countries. A price that some critics claim is too big in an age where climate change is a growing concern.
What Is Proof Of Stake
Proof of stake is structured to achieve distributed consensus on the valid ordering of transactions, similar to proof of work, i.e., finding agreement on a single, shared version of history. Blockchains based on proof of stake require nodes in the network to validate blocks rather than allocating computational power to “mine” them.
Participants contribute a stake, their private or collective capital to the company in the form of the network’s native tokens, which ensures security and consensus. A proof of stake scheme serves as a cryptographic proof of ownership and vested interest in the project’s success.
To help manage the network, nodes use a smart contract to “lock up” native tokens, making them not spendable for the duration of the contract. To extend the consensus history on the blockchain, a deterministic algorithm randomly selects which nodes become validators for each new block.
This randomized selection process, as well as stakeholders’ vested interest (stored value) in the network, is intended to disincentivize participants from attempting to sabotage history and choosing to undermine the system.
The cryptocurrency Ether (ETH) is a high-profile example of a project that is currently in the process of migrating away from proof of work toward proof of stake. Its developers argue that, once successful, proof-of-stake will be more environmentally sustainable, as it dispenses with the dizzying amount of power needed to maintain Bitcoin. They also claim that the system is more resistant to monopolies and centralization of power within the network, as participation is decoupled from the control over hardware and resources.