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Proof of Stake vs Proof of Work: What’s Better?

Cryptopolitan


Proof of Work and Proof of Stake are consensus mechanisms. They are the methods used for confirming transactions done on the blockchain network without involving a third party. It seems they perform the same functions. However, there are some differences between them. 

Perhaps you are interested in knowing what each consensus mechanism is and what each entails. Or perhaps you want to have a broader knowledge of how Bitcoin and other cryptocurrencies are mined. In this article, you will learn what these models are and what they entail. You will also learn the different methods by which the models verify transactions. 

Proof of Work (PoW)

Proof of Work was created by Satoshi Nakamoto when he needed a way for transactions on his cryptocurrency to be verified without involving a third party. Satoshi Nakamoto is the name behind the first cryptocurrency, Bitcoin. The PoW system is the result of his innovation on the transaction confirmation method.

The Proof of Work is used to determine blockchain consensus. That is, it is used to determine the validity of transactions. The system wants to know if the transactions are genuine and not false. The Proof of Work system will enable the network to determine if a user is not trying to “eat his cake and have it,” that is, transact the same fund twice.

Proof of Work is based on cryptography, a sort of advanced mathematics. Cryptography is based on complex mathematical equations that are so hard that the only way to solve them is to use powerful computers. The system does not generate one equation twice. Therefore, if an equation is solved, the computers record it as an original transaction.

After the creation of Bitcoin, several other cryptocurrencies have come up using the original Bitcoin code. Because they are copying Bitcoin, these cryptocurrencies have to use the Proof of Work as well. 

Proof of Work is a great technological innovation that made waves in its early days and helped solve these equations and confirm transactions. However, it has its limitations. The model requires heavy electricity to confirm transactions. The heavy computer used drained energy fast. Also, the model can only handle a limited number of transactions twice. Therefore, if you have many transactions to process, you would have to solve the equations gradually. 

As typical in blockchain technology and the crypto world generally, a limitation gives rise to better inventions. Therefore, after the Proof of Work, several other consensus mechanisms have been created. One of the most popular of these consensus mechanisms is the Proof of Stake model.

Proof of Stake (PoS)

Proof of Stake vs Proof of Work: What's Better? 2

The Proof of Stake came on board in 2012 when it was created by two developers Sunny King and Scott Nadal. They created this model to combat the limitation of the PoW model. During the launch of the PoS model, the developers claimed that the PoW model and Bitcoin consumed electricity costing up to $150,000 daily.

The Proof of Stake model was first used for the Peercoin blockchain project. With this new model, there was a more equal and fairer mining system and efficiency in transactions. Not only is there improved scalability in transactions, but the system also relied less on electricity, ruling out the high electricity bills that the PoW model incurred. 

Given these advantages, there is increased interest in the system. Developers and stakeholders have their eyes on the model. Ethereum, the second most popular digital currency globally, moves from the Proof of Work model to the Proof of Stake system. 

Which blockchain network uses which consensus mechanism?

Proof of Stake vs Proof of Work: What's Better? 3

The Proof of Work model and the Proof of Stake model are the two most popular consensus mechanisms in the crypto space. While some blockchains have stuck with the Po models, some have pitched their tents with the PoS model. 

Blockchain network using the Proof of Work model

Some of the blockchain networks using the Proof of Work model are:

Bitcoin

The Bitcoin blockchain is the original user of the PoW model. Bitcoin is the first cryptocurrency to be created, and since then, it has opened the door for others to follow suit. The Bitcoin blockchain can verify seven transactions per second. This number is not the best that can be, but the system has progressed with this capacity. Also, each transaction takes 10 minutes to be confirmed by the network. 

The consequence of these limitations is the increase in transaction fees. Since the creation of the network in 2009, the transaction fees have piled up to incredible amounts from the relatively small amount it initially cost. In the early days of Bitcoin, it cost only a fraction of a cent to complete a transaction. 

This low transaction fee made transferring small amounts efficient and popular. However, as the days and years went by, transaction fees in the Bitcoin network became expensive. In December 2017, when the network was bustling, transaction fees skyrocketed to $40 per transaction. 

It is a relief that the network does not cost so much presently, but the transaction fee is still too much on the high side for most users. The limitation of the model and the price is why the network may not be a suitable global payment system.

Ethereum

Going by market capitalization, Ethereum is the world’s second-largest and most popular cryptocurrency. The Ethereum network has a fantastic record in terms of transaction volume. It records more than one million transactions on its platform per day. Its use of smart contracts is another reason why it is the leader of the pack. 

This crypto uses the Proof of Work model. However, as is the usual thing with technological innovation, there is an improvement in what Bitcoin offers. The Ethereum crypto can handle transactions in just 16 seconds. This feat is an improvement on the transaction time of Bitcoin that would take up to 10 minutes. There are crypto platforms with faster transaction speed, but this improvement is impressive. 

The downside is that the scalability issues that Bitcoin users were facing are still combating Ethereum users. The network is created to handle 15 transactions. This number is still low compared to the demands of the network.

Bitcoin Cash and Litecoin are other popular blockchains that also use the Proof of Work model. 

Blockchain networks using the Proof of Stake model

The Proof of Stake model is an alternative to the Proof of Work model. It was created to perform the functions of the Proof of Work system but with higher efficiency and offer. The Proof of Stake model allows the miner to verify transactions based on the amount of coin. In other words, the more coins a miner owns, the more mining power the user has. 

The PoS model is a significant improvement on the PoW model. Unlike the previous model that required a high energy supply to complete transactions, the PoS model is based on the amount of coin a miner owns. In the PoW system, miners have had to sell their coins to afford the mining costs, but with the PoS system, there is no need for that. The more coins you win, the more you can mine.

The PoS model is created for improved security. It is designed to discourage attacks from miners. The system is built to compensate miners for discouraging them from attacking the network because it will not be advantageous. Some cryptocurrencies use the PoS model, including:

Dash

Dash uses the Proof of Stake model that enables it to make transactions in seconds. The network is capable of sending and receiving funds with a few seconds.

NEO

NEO is a Chinese innovative contract protocol that has taken crypto space by storm. It was launched in 2016, and since then, it has recorded a remarkable 100,000% increase in value.

How are transactions verified in the PoW and PoS models?

Proof of Stake vs Proof of Work: What's Better? 4

It has been established that both the Proof of Work and the Proof of Stake models are consensus mechanisms. They are meant for verifying transactions. Here, we will discuss how each of the models handles transaction verification.

Proof of Work transaction verification process

Several blockchain networks use the PoW models. This example uses blockchain. However, the processes are the same for each cryptocurrency that uses the system.

When a user initiates a transaction within the Bitcoin system, a block is created where the transaction is fitted. Each block contains a different transaction, and each transaction has to be verified independently. New blocks can be added to the blockchain.

To verify a transaction without the input of a third party, the miners or the nodes have to solve a complex mathematical problem that is the Proof of Work puzzle. Several miners are working on this cryptographic problem; whoever solves it first gets a coin reward. When the decryption is done, the system will add the solved block of transactions to the blockchain, and it will be accessible to the public.

The thing with this system of rewarding whoever solves the cryptographic algorithm first is that people who have expensive and heavy hardware devices will be at the top of winning these rewards. 

Proof of Stake transaction verification process

The PoS model is created to achieve distributed consensus. In verifying transactions and reaching consensus, the PoS system uses a different method from the PoW model. While both models work with cryptographic algorithms, the objectives are different. In the PoS model, the Stake depends on the number of coins the person owns for the specific blockchain they want to mine.

In the PoS model, there are no rewards, so technically, people do not mine. Instead, the individuals are forgers. The contributors to the PoS system will earn the transaction fee. 

To solve a transaction, the forgers, or users, will have their coins in a particular wallet that freezes the coins. This freezing implies that the coins are used to stake the network. Some blockchains operating the PoS system require that miners have the minimum required coins necessary for a user to start staking. Having staked this required amount of coins, any user can earn the reward, which is the transaction fee.

From the preceding, there is a difference in the reward for the miners. In the PoW system, all the miners attempt to solve the cryptographic algorithm. The winner gets the reward which is the coin of the cryptocurrency being mined. A miner with the best hardware with computing power has a higher chance of winning the reward.

In the Proof of Stake system, the models choose the winner depending on the number of coins they have staked. The winner can be anyone who has met the required minimum amount of coin to be staked. 

Most people prefer the PoS system because it is more secure compared to the PoW system. The theory behind this model is that those who stake their coins are more likely to secure the network by doing things correctly. If a forger decides to do a shady transaction, they are in danger of losing their entire Stake. This system will spur them to maintain the network. 

Also, the model rewards forgers based on the amount they stake. You are likely to earn more if you stake more. However, you are likely to lose your coins if you initiate a transaction contrary to the system’s workings. 

Also, the mining process in the PoS model does not require high power consumption like the PoW model to verify a transaction. The amount of electricity needed to verify a Bitcoin transaction is very high. 

This energy consumption is one of the reasons why the PoS model seems to be people’s preferred choice over the PoW system.

Conclusion

In discussing Proof of Work vs. Proof of Stake, we have discoursed the different aspects of both models and how they are used to verify transactions. In the PoW system, with transactions verified in each block, a reward is given to the winning miner. Miners who have hardware with high computational power are more likely to win and get the reward. The high annual energy consumption rate of the PoW model is one reason the PoS model came on board.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.



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