All You Should Know About the Proof of Stake (PoS) and Proof of Work (PoW) Consensus

The Key Points 

• A consensus mechanism refers to any number of methodologies used to achieve agreement, trust, and security across a decentralized computer network.

• In the context of blockchains and cryptocurrencies, Proof-of-Work (PoW) and Proof-of-Stake (PoS) are two of the most prevalent consensus mechanisms.

Proof of Work (PoW) Consensus

Proof-of-Work (PoW) is the initial consensus process in Blockchain networks, in which users exchange digital tokens, verify transactions, and add new blocks to the chain. All miners or validators engage in this method by carefully validating and confirming transactions on the network to be paid. 

The distributed ledger collects and organizes all of the validated transactions in the network into blocks.

Mining is the term for this procedure. Proof of Work is a security system that protects against cyber threats such as distributed denial-of-service (DDoS) attacks, which aim to deplete computer resources by sending repeated fraudulent requests.

How Does the POW Works?

For finding digital currency, the miner or validator must do complex mathematical calculations or puzzles. The correctly confirmed transactions are subsequently recorded in the next block, forming a new block group in the blockchain, a public distributed ledger. 

What Do You Mean by a “Mathematical Puzzle?”

It is a problem that needs a lot of computational power to solve. The answer to the PoW puzzle or mathematical equation is called a hash. The purpose of mining is to check the authenticity of a transaction and create a new cryptocurrency, which is mined by the awarded validators for their prior labor. If the miner completes the task first, they will be rewarded with a new bitcoin, attracting new miners.

Why Is Proof of Work Required for Cryptocurrencies?

Blockchain technology, like bitcoin networks, is designed to be decentralized and peer-to-peer. Thus, they need a mechanism to achieve both consensus and security. Proof of Work is one such mechanism that makes attempting to overrun the network excessively resource-intensive. Other verification procedures, such as Proof of Stake (PoS) and Proof of Burn, are less resource-intensive but have other downsides or issues. The network and the data stored on it would be exposed to attack or theft if no proof mechanism was in place. 

How Is This Algorithm Implemented in Blockchain?

Miners crack the code, create a new block, and verify the transactions.

The number of people, current power, and network traffic all influence how difficult a challenge is. Each block’s hash includes the hash of the previous block, increasing security and preventing block violations.

If a miner is successful in solving the challenge, a new block is created. The transactions are recorded in this block and are regarded as complete.

Lots of Cryptocurrencies Use Proof-of-Work.

Bitcoin is the most well-known PoW application. Bitcoin was responsible for laying the groundwork for this form of consensus. Hash cash is the name of the puzzle. This approach allows you to change the complexity of a puzzle based on the network’s total power. Block formation takes about 10 minutes on average. Litecoin and other bitcoin-based coins use a similar system.

Ethereum is another massive project that uses PoW. Given that Ethereum is used in nearly three out of every four projects, it’s safe to assume that most blockchain apps use the PoW consensus technique.

The Drawbacks of Proof of Work 

Proof-of-Stake (PoS)

Proof of Stake is a consensus technique with the same goal as PoW but differs in validating transactions in a distributed network. Proof-of-Stake is based on a monetary value called stake. A stake is a sum of money that is locked up for a specific period. In PoW, there is no financial reward for validating and confirming transactions within a block; instead, miners receive transaction charges for completing the process. PoS is a stake-based system that focuses on the number of cryptocurrencies on a blockchain to create new blocks rather than wasting many resources, energy, or processing power like PoW. 

Working Mechanism of PoS

Proof of Stake is related to the size of the network and the number of persons who stake the digital currency. There will be fewer awards if a large number of people stake the coin. Furthermore, if the users have more cryptocurrency in their possession, more extended periods result in higher transaction fees as a reward; yet, the process should be shared across the network to control the process.

This concept operates similarly to a fixed deposit at a bank. One person is unable to obtain the currency. The customer gets more money interest for maintaining a large sum of money for a prolonged period. 

In a Proof-of-Stake system, a creator is chosen based on their wealth, defined as the number of coins or stakes. The forger is the individual who validates the transaction and adds a new block. To generate a new block, the forger stakes their money and validates the transactions to add a new block. If the validator discovers any fraud, they may lose their stake and permission to proceed with the case transaction.

It is now necessary to choose the forger who will forge the next block. The proper method for selecting a forger is as follows:

1) Randomized Selection – The user with the lowest hash value and the most significant stake will be able to choose the next block.

2) Forger Selection Based on Coin Age – The forger is chosen based on the coin’s age.

Proof of Stake Mining Power

The amount of coins stacked by a validator determines mining power in the Proof of Stake consensus. Participants who stake more coins have a better chance of being chosen to add additional blocks to the game.

Each Proof-of-Stake protocol chooses validators in a distinct way. The selection procedure is normally random, and it can also be influenced by other criteria, such as how long validators have been stalking their coins. Although everybody staking crypto has a chance of being chosen as a validator, the chances are slim if you’re taking a tiny amount. If your coins make up 0.001% of the total amount staked, your chances of getting picked as a validator are roughly 0.001%. It is the reason why the majority of players join staking pools. The validator node is put up by the owner of the staking pool, and a group of users pools their funds for a better chance of winning new blocks. The rewards are distributed among the pool’s members. The pool owner may charge a minor fee.

Proof of Stake vs. Proof of Work

Proof of Stake and Proof of work are the two most common types of consensus mechanisms cryptocurrencies used. 

PoW was the process of choice for early cryptocurrencies, including Bitcoin.

Proof of stake originated in 2012 with Peercoin and has become a standard option for altcoins.

The significant difference between Proof of Stake and Proof of work is their energy usage. 

In Proof of Work, miners need to solve a complicated mathematical puzzle. 

Proof-of-stake cryptocurrencies can execute transactions quickly and at a cheap cost, which is essential for scalability. Investors can stake their crypto to get rewards, allowing them to earn money while they sleep.

Proof of stake is environmentally friendly; it is likely to become increasingly popular as a consensus method in the future.

If you own crypto and plan to trade it in the near future, you are good to stake it. You do not need any work at your end, and you will be earning more crypto. What if you don’t currently have any cryptocurrency to stake? There are a lot of cryptocurrencies that allow staking, but you need to consider whether each one is a suitable investment first. Buying a coin for staking only makes sense if you also believe it is a good long-term investment.

Widely Used PoS Tokens by Market Capitalization

Solana (SOL): It is a decentralized blockchain designed to support scalable and user-friendly pertinence. It has the ticker SOL and a naive coin named Solana.

Algorand (ALGO): It is an independent, decentralized, blockchain-based network that may be used for various purposes.

Tezos (XTZ): Tezos is an open-source platform backed by a worldwide community of validators, academics, and builders that overcomes key barriers to blockchain adoption for assets and applications.

Celo (CELO): Celo (CGLD) is an open-source Proof-of-Stake (PoS) blockchain with an algorithmic reserve-backed stability mechanism for stable coins and tokenized assets.

Mina (MINA: Mina creates a link between the real world, cryptography, and the infrastructure for a safe and democratic future.

BitShares (BTS): BitShares is a real-time financial platform that is open-source, public, and blockchain-based.

LTO NETWORK: The LTO Network is a hybrid blockchain network with Business-to-Business (B2B) capabilities.

Widely Used PoW Tokens by Market Capitalization

Bitcoin (BTC): Bitcoin is a sort of cryptocurrency that is protected by encryption. There are no actual bitcoins; instead, balances are recorded on a public ledger that anybody may view over the internet, though each entry is encrypted.

Dogecoin (DOGE): Dogecoin (DOGE) was launched in 2013 as a fun alternative to existing cryptocurrencies such as Bitcoin.

Litecoin( LTC):  Litecoin is a cryptocurrency created by a former Google engineer named Charlie Lee in 2011, two years after bitcoin.

Ethereum Classic: Ethereum Classic is an innovative contract-based decentralized computing platform. It’s a decentralized network with a blockchain ledger, native cryptocurrency (ETC), and a thriving ecosystem of on-chain applications and services.

Monero (MXR): Monero is a digital currency that provides users and their transactions with a high level of privacy.

By learning about PoW and PoS working and processes, we can conclude that the Proof of Stake model is much better than Proof of Work in many ways, and it solves lots of issues. There are many issues related to the Proof of Work, such as the amount of electricity it consumes, the centralization of power, and a 51% attack threat.