Blockchain technology operates on a network, and each cryptocurrency abides by a system of standards and regulations. Consensus mechanisms or consensus algorithms are the principles or procedures that govern blockchain networks and provide insurance against the external world, i.e. hackers and cyber-attacks.
When we talk about blockchain or cryptocurrencies, the first thing that comes to mind is Bitcoin and Ethereum. Typically, blockchain platforms like these use a consensus mechanism, which is Proof of Work (PoW) or Proof of Stake (PoS). The security of cryptocurrency transactions depends on these two concepts.
Consensus algorithms like PoS or PoW ensure control and validation of the transaction process to be recorded to a new block of the blockchain database without worrying about any centralized authority. Both, in various ways, aid in ensuring that users are genuine with their transactions by rewarding good conduct and making it very challenging and costly for negative behavior.
Ethereum uses the Proof of Stake (PoS) consensus mechanism, while Bitcoin uses the Proof of Work (PoW) consensus mechanism. Knowing the differences between PoW and PoS is essential for understanding each enterprise blockchain platform and cryptocurrency.
What Is Proof of Work?
The first cryptocurrency, Bitcoin, is reported to have used Proof of Work as the blockchain’s first consensus mechanism. With the right effort, the proof of work consensus mechanism can keep the network from becoming infiltrated by unknown operations. It is a decentralized consensus technique that incorporates participants capable of solving complex mathematical problems or equations to keep the system from being clogged or compromised by anyone.
Proof of Work blockchains is frequently employed in mining cryptocurrencies, primarily bitcoin, which uses the proof-of-work consensus algorithm. In PoW, miners solve equations to create new blocks, which are then recorded in the ledger. Cryptocurrencies that allow miners to create new blocks or tokens and require transaction authentication employ Proof of Work.
This makes it possible for miners to earn from their mining expertise. They receive cryptocurrencies such as Bitcoins as a reward. Some of the most popular cryptocurrencies that use Proof of Work are Bitcoin (BTC), Litecoin (LTC), Bitcoin Cash (BCH), and Dogecoin (DOGE). You can buy a dedicated server with Bitcoin.
This algorithm uses SAH-266 hash functions, which give the system a reliable process and produce a highly secure peer-to-peer network. As a result, this system doesn’t need a central authority, but the scaling consumes tremendous energy. It only rises in value as the network and the number of miners expands. Proof of Stake is implemented as a solution to this problem and is considered a proof of work substitute.
To learn more about enterprise blockchain platforms, you can read more on Hyperledger vs. Corder vs. Quorum.
How does PoW work?
Every transaction block on a blockchain with a proof-of-work consensus mechanism has a unique hash, a fixed-length character string that cryptocurrency miners compete to decipher through trial and error. Miners must solve these cryptographic problems, which get more difficult with each subsequent block, to authenticate a transaction and record it on the blockchain.
Benefits of PoW
- High-security level
- Proof of Work allows miners to earn cryptocurrency rewards.
- It provides a decentralized technique for verifying transactions.
- High energy usage
- Mining requires expensive equipment.
- Highly susceptible to “51%” attacks, in which one miner has access to more computer power than the rest of the network combined.
- Many consider the numerous mining pools’ high concentration a type of centralization.
- It is ineffective with slow transaction speeds.
- It is relatively expensive to use.
What Is Proof-of-Stake?
Only the miners with the most significant coin holdings can validate a transaction using the Proof of Stake consensus mechanism. The miners will be more potent if there are more coins. It serves as an alternative validation method to the Proof of Work consensus mechanism which uses an excessive amount of energy.
Therefore, a Proof of stake model has been created to overcome this problem. It is an environmentally friendly consensus method that relies more on financial than computational power. Ethereum actively uses the Proof of Stake consensus mechanism as its blockchain infrastructure. Also, altcoins employ the proof of stake mechanism, which is less vulnerable to attack by miners.
It is sometimes considered more secure than the Proof of Work consensus algorithm. When using the Proof of stake system, the validators who hold the most money or tokens in their wallets can mine the subsequent block. Following its approval and verification, these validators add the transaction to the subsequent block on the blockchain. The network’s largest stakeholder has more benefit and authority.
How does PoS work?
Users must first store a certain amount of the network’s native cryptocurrency in a smart contract until their projected transaction blocks are recorded to be chosen as validators for subsequent transaction blocks.
Validators are compelled to follow the regulations since doing otherwise puts them in danger of losing their share, which might be worth tens or even hundreds of thousands of dollars. Proof of stake allows validators to demonstrate the scale of their presence in the ecosystem, unlike proof of work, which is simply a math competition between extremely powerful computers.
Validators are chosen chiefly based on the amount they stake and other factors, such as how long they have had the assets staked. Three well-known cryptocurrencies that use the proof of stake consensus mechanism are Solana (SOL), Cardano (ADA), and Polygon (MATIC).
By market capitalization, Ethereum is the second most widely used cryptocurrency, but in 2022 it changed from proof of work to proof of stake as its consensus mechanism.
- It is independent of computer hardware and uses less energy.
- Incredibly scalable and enables much higher transaction rates.
- No equipment needed, lowering entrance barriers and promoting ecosystem expansion.
- The requirement for staked assets makes the network far less susceptible to attacks.
- Required to make a sizable initial investment to compete in the validator selection process
- The largest token holders may have an advantage over others in the network power balance.
- Consensus mechanism is less well-established than proof of work.
Proof of Work vs. Proof of Stake
To understand these two consensus mechanisms, let’s look at some significant differences while considering some criteria.
- Energy Consumption
Proof of work uses a lot of electricity and energy when considering the energy consumption parameter. Proof of stake, in contrast, uses less energy. The amount of energy used by PoS may be minimal to substantial.
- Required Tools
Heavy duty hardware, including computers with GPUs and hard drives, is used for the proof of work consensus procedure. Carrying out this task can be seamless by using a highly efficient computer. On the other hand, Proof of Stake does not need equipment or instruments because the intensive computation of nonce values is omitted.
Proof of work offers excellent security since miners must decipher the hash algorithms to generate or authenticate a new block. In contrast, Proof of Stake locks the cryptocurrency and builds a secure network.
For Proof of Work, the first miner to solve the equation receives the rewards. Bitcoin is used for payment as compensation. Proof of stake, on the other side, doesn’t reward with blocks or coins. The validators are responsible for paying the transaction costs.
Comparison Between PoW and PoS
|Mining/validating a block||The likelihood of validating a new block depends on the amount of stake or the total number of coins.||The likelihood of validating a new block depends on the amount of computing work.|
|Distribution of reward||The validators are paid a network fee, not a block or coin reward.||The successful miner receives a reward in blocks.|
|Competition||The algorithm selects a winner based on the value of their stake.||Miners must strive to use their computer processing power to solve cryptographic puzzles.|
|Forking||Forking is encouraged.||PoW systems inherently avoid serial forking by providing an economic incentive.|
|Security||Staking locks crypto assets to protect the network in exchange for a payment.||The harshness scales linearly with network security.|
|Efficiency and reliability||PoS systems are cost and energy-efficient but are less durable||PoW systems have more energy costs and are less expensive and more durable.|
|Adding a malicious block||Hackers would require to hold 51% of all cryptocurrency on the network to add a malicious block.||Hackers would require 51% of computing power to add a malicious block.|
|Specialized equipment||A standard server-grade device is enough for a PoS system.||The coins are mined using Graphics Processing Units (GPUs) and Application-Specific Integrated Circuits (ASICs).|
Conclusion: Which one should you choose?
Cryptocurrency networks use consensus algorithms, like proof of work or proof of stake, that improve security and validate transactions. High-performance computers are needed to solve complex mathematical equations as part of the proof of work procedure. Every system has advantages and disadvantages, and proof-of-stake and proof-of-work are no exceptions.
Each system has its advantages and disadvantages, and eventually, what you intend to use them for will determine which method is better for you. However, if you want to buy a dedicated server with Bitcoin for your project, you can contact us for more information.