What Is the Difference Between Proof of Stake and Proof of Work

 

Cryptocurrencies use a ton of electricity because of mining. In recent years people started working on a different technique called Proof-of-Stake. Not only does it use less energy, it can also be more secure.

The Proof of Work algorithm was first introduced in 1993 to combat spam emails. When Satoshi Nakamoto created Bitcoin in 2009, he realized that this mechanism could be used to reach consensus between many nodes on a network and he used it as a way to secure the Bitcoin blockchain.

Proof of Work is a requirement to define an expensive computer calculation also called mining. A Proof of Work algorithm works by having all nodes solve a cryptographic puzzle. This puzzle is a solved by miners. A reward is given to the first miner who solves each blocks problem. Network miners compete to be the first to find a solution for the mathematical problem. The Proof of Work rewards people with better and more equipment. The higher your hash rate is the higher the chance that you’ll be able to create the next block and receive the miners reward. This is why there are many companies are building huge facilities with the ability to mine cryptocurrencies.

Proof of Stake is based on the idea that letting everyone compete against each other with mining is just wasteful. So instead of an election process in which one node is randomly chosen to validate the next block, Proof of Stake has no miners but instead has validators and doesn’t let people mine new blocks but instead mint or forge new blocks.  

Proof of Stake, the creator of a new block is chosen in a deterministic way, depending on its wealth, also defined as stake. The Proof of Stake system there is no block reward so the miners take the transaction fees. Proof of Stake currencies can be several thousand times more cost effective.

The main problem with the Proof of Work construct is that it favors the rich and frustrates its purpose by centralizing all the mining efforts to large corporations who have the resources to push out large computing power.  There is another major disadvantage with the Proof of Work approach, if a corporation owns a majority stake in the network the corporation can approve fake transactions. This is referred to as the 51% attack.

On the other hand, there are a lot of risks involved with going with a Proof of Stake approach. First, the 51% attack is still possible. Second, the validation process is not completely random because the stake has to be factored in but at the same time the stake alone isn’t enough because that will favor rich corporations and centralize the money. Also, when a network chooses the next validator but if the validator doesn’t turn up to do his job this could prove to slow down the network.

Different coins have different approaches to mining and many are working to solve these various problems.