The Proof of Work and Proof of Stake consensus mechanisms are the two most used for blockchains in the cryptocurrency space.
The traditional Proof of Work consensus is the first to have been used in blockchain technology having been adopted by the Pseudonymous Satoshi Nakamoto for Bitcoin (the first cryptocurrency).
While the two biggest cryptocurrencies Bitcoin and Ethereum are using the Proof of Work consensus algorithm (Though Ethereum is planning to migrate to the Proof of Stake consensus mechanism with the release of Eth2.0), most third-generation cryptocurrencies are massively adopting the Proof of Stake consensus mechanism for their blockchain technology.
This Post Contains
- What Is A Consensus Mechanism And Why Is It Important To A Blockchain?
- What Is Proof of Work (PoW) Consensus Mechanism?
- How PoW Works.
- What Is Proof of Stake (PoS) Consensus Mechanism?
- How PoS Works.
- Proof of Work vs Proof of Stake.
- Proof of Work vs Proof of Stake— Which Is Better?
A consensus mechanism is one of the most important parts of a blockchain, not only does it help in validating transactions, it also designs how blocks are created and roles assigned to Nodes or validators. In addition the consensus algorithm of a blockchain plays a huge role in its scalability, security and decentralization.
Here’s a detailed analysis of the role of a consensus algorithm in blockchain technology as well as the features of the Proof of Work and Proof of Stake consensus mechanisms.
What Is A Consensus Mechanism And Why Is It Important To A Blockchain?
Cryptocurrency blockchains are not just about swapping Token X for Token Z or Staking your digital assets for rewards. For all this (amongst other things) to happen, blockchains need a way of determining the authenticity of these transactions, creating new blocks, recording information about the distributed ledger and ensuring the security of the blockchain.
To achieve this, consensus mechanisms come into play. They design how the blockchain runs, the method by which the blockchain operates and assign roles to Nodes (Validators) who verify transactions, create new blocks and determine their legitimacy before they’re added to the main chain.
A Consensu mechanism is a method of synchronizing the networks and Nodes on the blockchain to determine which transactions and blocks are valid before they’re approved and added to the blockchain.
What Is Proof of Work (PoW) Consensus Mechanism?
The Proof of Work consensus algorithm is native to Bitcoin. Ethereum and Litecoin are other cryptocurrencies using the Proof of Work consensus for their blockchains.
Proof of Work consensus mechanism is a consensus model used to verify and record transactions that requires that a miner expend a required amount of computational power to generate a hash before they can update blocks or mine new cryptocurrencies.
How PoW Works
Miners compete to solve complex mathematical puzzles in order to generate the correct hash that matches the current block. The miner who comes up with the correct hash gets to update the block and earn rewards.
The Proof of Work consensus is designed to make finding the correct hash for the target block difficult, in order to prevent manipulation of data and ensure the security of the blockchain.
This consensus mechanism has been heavily criticized as it’s energy intensive requiring miners to use high computational power to mine cryptocurrencies and generate new blocks.
What Is Proof of Stake (PoS) Consensus Mechanism?
Unlike the Proof of Work consensus that relies on Computational power, The Proof of Stake consensus mechanism relies on Financial power. In other words, The higher your stake, the higher your chance of being selected as a validator.
In Proof of Stake, Nodes (Validators) have to stake their cryptocurrencies before they can be allowed to take part as validators and create new blocks in exchange for rewards.
How PoS Works
Only holders of the blockchain’s cryptocurrency are allowed to participate as validators.
To be selected, Owners of the cryptocurrency have to stake their cryptocurrency so it can be used to verify transactions.
Once there’s a new block of transactions to be verified, the Proof of Stake protocol will select a validator to inspect the block and check if the transactions are legitimate. Once the validator verifies the block and completes the task, he earns more cryptocurrencies as a reward for his efforts.
However, the higher the percentage a holder stakes, the higher his chance of being selected to participate in the consensus protocol.
Proof of Work vs Proof of Stake
- In terms of Security, Proof of Work is more secure than Proof of Stake. This is because it is difficult to attack a Proof of Work protocol as the fraudsters need to set up mining equipment, compete with other miners to solve the mathematical puzzles and attempt to double spend by adding a counterfeit block of transactions to the block.
If the fraudulent miners successfully solve the puzzle, they’ll have to broadcast their counterfeit block of transactions on the network. After which it will be verified by Nodes who will render it illegitimate once they discover that the block is fraudulent.
However, the fraudulent miners can manipulate the consensus protocol, if they control 51% of the overall computational power and Nodes of the block chain.
This makes it extremely difficult, time consuming and capital intensive to manipulate Proof of Work protocols.
- Proof of Stake is more energy efficient as mining in Proof of Work requires a great deal of electricity.
- Proof of Stake protocols are faster and offer lower transaction fees to users compared to Proof of Work.
- In Proof of Stake, validators with large holdings have more influence in the protocol as they have a bigger chance of being selected as validators.
- Proof of Stake is cheaper to run as validators only need to purchase the required crypto currency once and stake it. On the other hand, Miners in the Proof of Work protocol must purchase mining equipment, frequently spend money to maintain it and replace it if the need arises.
Proof of Work vs Proof of Stake— Which Is Better?
Blockchain technology keeps evolving along with the expectations of institutions and users. For the most part, how blockchain technology affects the real-world environment is a major concern for decentralized finance institutions, critics and users of cryptocurrency which has led to the massive adoption of the Proof of Stake consensus mechanism by blockchains as it’s more environmentally friendly than Proof of Work.
In short, Proof of Stake has proven to be a better option for both DeFi protocols and cryptocurrency users.