X

Lucas from San Jose

Signed up at ETH Play 36 minutes ago.

» Try ETH Play too
Do not show again

Deep Dive: Proof of Work vs Proof of Stake

A bitcoin sits next to an ether coin
Blockchain has the potential to produce revolutionary change in a multitude of areas and sectors, However, most people – including plenty of cryptocurrency investors – don’t fully understand the technology that underpins it. We aim to educate and inform you to help you make smarter choices when investing in blockchain and crypto.

Two of the most well-known terms within the crypto space are Proof of Work (PoW) and Proof of Stake (PoS). Crypto Lists bring you a concise guide to these two unique consensus mechanisms. Sometimes these are also referred to as consensus methods or consensus models, but ultimately they all mean the same thing. These are two of the most famous mechanisms because one (PoS) is used by the Bitcoin blockchain and the other (PoS) is now used by Ethereum.

The Ethereum Merge brings the two models into focus

The majority of 2022 Crypto news has revolved around the much anticipated Ethereum Merge, as reported by Crypto Lists. After much reporting and speculation, the day finally arrived in Mid-September. The completion of the Ethereum Merge coincided with Ether’s (ETH)
price having a modest drop shortly afterwards. This was the first instance of a clear and actual view of how the shift might impact various cryptocurrencies’ value away from prior speculations.

The speculations were mostly on how the Merge would affect the value of crypto coins and tokens in the short term as it’s perhaps challenging to predict its long-term effects. However, the shift is still significant to the crypto industry as the change signifies differences in the consensus mechanism in validating transactions on a blockchain network.

The long-planned upgrade of the Ethereum Network was from its proof-of-work model to a proof-of stake-consensus. Casual investors are yet to notice any particular distinction since the transition.

Continuous Comparisons between PoS and PoW

Several experts in the crypto industry prescribe to the proof-of-stake model. They view it as a better and more efficient consensus mechanism for a blockchain network. Adam Blumberg is the Certified Financial Planner, Co-founder, and President of Interaxis, a company specialising in offering consultation services to financial advisors on crypto assets. He acknowledges that various blockchain networks utilise either mechanism in verifying transactions. However, he believes that the proof of stake mechanism is more suitable for financial systems.

Comparisons between the two mechanisms will always be there and investors must understand each of them and their various pros and cons.

Understanding the Functionality of the Proof of Work Model

The proof-of-Work (PoW) model is the pioneer consensus mechanism in the crypto market as it has underpinned the Bitcoin blockchain since its launch in 2009. The PoW model functions where other computers within a network validate and approve transactions added to a blockchain network before new blocks are developed and entered into the blockchain.

The consensus protocol requires users to solve cryptographic puzzles via their computers to earn the privilege of verifying transactions on the blockchain. The process of solving these cryptographic puzzles to validate transactions is called cryptocurrency mining. There exists a long string of numbers and letters, known as hashes, that would stave off malicious attacks and validate transactions. The blockchain can only generate one hash when it’s fed data through a function of the network as the basis of transactions on the protocol.

Where there is a transaction on the blockchain, the resulting hash distributes to the entire network. This also applies to bitcoin transfers to another address. Therefore, if anyone tampers with the hash, it would be identified in the network and rejected.

The PoW allows blockchains to maintain their ‘trustless’ feature. This ensures means that no third parties are required to verify and manage the transactions. Adam Blumberg points out that PoW, especially for the Bitcoin protocol is the supreme mechanism in asset development. He highlights that the time, effort, and conversion of energy to value make it so powerful in supporting Bitcoin’s value.

QR code to visit AvaTrade
Info symbol Get AvaTrade

UK flag
Rating: 8.78/10
Number of instruments: 35+ instruments

Description: Begin building your digital asset portfolio with AvaTrade. Sign up for free today!

Risk warning: 71% of retail investor accounts lose money when trading with Avatrade.

Never speculate with money which you can not afford to loose. Cryptocurrencies exhibit significant volatility and remain largely unregulated within numerous European Union nations. They are not covered by European Union protections and do not fall under the purview of the EU’s regulatory framework. Please be aware that investments in this sector are prone to market risks, which may include the total loss of the invested principal.

Understanding the Functionality of the Proof of Stake Model

The Proof-of-Stake(PoS) consensus mechanism is the alternative to PoW. In the PoS model, users can develop a node as an individual or a collaborative pool that functions as a validator computer in securing the Pos model. The PoS model relies on validators that own the native token of the particular blockchain. Validators must lock up their own native blockchain tokens in the network through staking. Staking facilitates the validators to provide collateral when they are selected to validate a transaction. The blockchain randomly selects a validator, approximately based on how many tokens they have locked in the network. Accurate validation of a transaction yields rewards to the chosen validator once the transaction goes through.

Multiple validators must agree upon the accuracy of a transaction. When the threshold of the number of nodes is reached, the transaction goes through. The selected validator then receives a reward. If the transaction is inaccurate or fraudulent, the selected validator loses part or whole of their staked tokens to the network as the network destroys these coins.

As Blumberg highlights, the PoS model is an energy-efficient consensus protocol compared to PoW. This is why many environmental activists and campaign groups have affirmed their preference for cryptos that use the proof-of-stake mechanism.

It is, however, challenging to maintain the security and decentralisation of proof of work when using the PoS model. The PoS model has to address this concern to achieve a long-term decentralised finance (DeFi) system. It must be fast, secure, and provide real-time transactions. It’s for this reason that ‘Bitcoin Maximalists’ and DeFi devotees remain committed to the PoW method for the time being.

Advantages and Disadvantages of the POW Model

The PoW mechanism requires several participants across the protocol to countercheck and validate transactions. This ensures that the validation process is more decentralised. It’s often the preference of the crypto industry that protocols are to be more decentralised.

However, several participants translate to several computers being in use for the validation process. The more computers, the higher the energy used in the process. There has been a significant increase in cryptocurrency adoption in recent years. This has been led by traditional financial institutions which have unintentionally exposed the environmental impact of cryptocurrency mining. As mainstream adoption takes shape, increased scrutiny over the model develops. The model has a high barrier to entry by design with higher costs to validate transactions. This effectively prevents hacks and malicious attacks on the blockchain network. These attacks have been especially prevalent in the crypto market.

The nature of the PoW model results in slow transactions and an adverse environmental impact. And, the model is not always practical for some of the use cases of blockchain. Users cannot underestimate the importance of PoW for Bitcoin. However, Blumberg believes financial systems cannot be built on the PoW mechanism. He believes that PoS and ‘Proof of History‘ facilitate the development of thriving financial systems.

Advantages and Disadvantages of the PoS Consensus

Several crypto experts showcase that the Proof of Stake consensus mechanism contains more pros compared to the Proof of Work model. The model portrays faster transaction speeds and is more energy efficient. This facilitates blockchain scalability in the number of transactions per second. This creates a massive appeal and has more adoption, especially among new crypto users.

The PoS model provides users with several ways of earning crypto. There are liquidity pools in which users can lock up their coins and receive more tokens as a reward. The opportunity to earn more increases its appeal further as users integrate into a financial system.

Despite the lucrative rewards appeal, you must be more cautious in the cryptocurrencies you invest in. The infancy of the crypto market has several altcoins offering larger staking rewards with a higher chance of collapsing. It has less security than the PoW and is harder to decentralise the network.

PoW vs PoS Energy Consumption

As discussed, the PoW model has a higher energy consumption than the PoS model. According to the Cambridge Center for Alternative Finance, the pioneering network of Bitcoin consumes similar amounts of energy as the nations of Malaysia and Sweden. This is due to the PoW system use of sheer computational power, meanwhile some Bitcoin mining companies have enormous computing hubs. However, some are starting to point out the green case for Bitcoin’s blockchain.

The PoS model uses significantly less energy as it does not require any specialised equipment. It only requires the average laptop hence allowing for blockchain scalability and less electronic waste to be generated. Its nodes are virtual spaces. The Ethereum foundation revealed that the Ethereum merge shifting the network from PoW to PoS will save 99% more energy.

Prominent Blockchains Using the PoW Model

Bitcoin hosts the most reputable PoW blockchain. Other blockchains utilising PoW include Litecoin, Bitcoin Cash, Dogecoin, and Monero. Many insiders have the opinion that both mechanisms can coexist together with upcoming consensus protocols. These include Solana’s Proof of History for verifying transactions.

You can read more about the environmental impact of moving to proof of stake in our guide here.

QR code to visit AvaTrade
Info symbol Get AvaTrade

UK flag
Rating: 8.78/10
Number of instruments: 35+ instruments

Description: Try highly popular Scandinavian platform for trading. Sign-up for a free demo account now!

Risk warning: 71% of retail investor accounts lose money when trading with Avatrade.

Never speculate with money which you can not afford to loose. Cryptocurrencies exhibit significant volatility and remain largely unregulated within numerous European Union nations. They are not covered by European Union protections and do not fall under the purview of the EU’s regulatory framework. Please be aware that investments in this sector are prone to market risks, which may include the total loss of the invested principal.

Newsflash
    €1,000,000 insurance when trading crypto with Skilling€1,000,000 insurance when trading crypto with Skilling
    Wednesday, 8 Feb 2023 12:27 pm
    As of February 01 the Scandinavian crypto broker Skilling have covered all account with up to €1m per account. This is great news for anyone looking for additional peace of mind when thinking about their funds. Already a highly regarded broker, Skilling's move has solidified their reputation as a truly premiere destination for all-things trading. Sign up for Skilling now!...
    Read the full newsflash


    Get Black Friday freebies from Skilling!Get Black Friday freebies from Skilling!
    Friday, 25 Nov 2022 2:48 pm
    It's Black Friday ladies and gentlemen, and that means one thing: discounts and freebies! Skilling is offering specific trading options without spread and brokerage fees for the next three days. Want to get your hands on these exciting goodies? Sign up for Skilling now and get started with crypto trading through...
    Read the full newsflash


    Skilling add Credit Suisse CFDs after market turmoilSkilling add Credit Suisse CFDs after market turmoil
    Thursday, 6 Oct 2022 6:20 pm
    The Scandinavian CFD broker Skilling is adding the heavily discussed bank, Credit Suisse, to their list of CFDs. The entire stock- and crypto market was in free fall after worries that both Credit Suisse and Deutsche Bank could collapse last week. Al Jazeera reported that while it mostly could be rumours, the need for a restructuring of the business is clear. Credit Suisse shares in Switzerland is trading at 88.75 CHF in 2007 and stood at 4.44 CHF when writing this. That is a drop of over 80% since the top. So, are you long or short? Trade Credit Suisse with Skilling today!


    Breaking: Skilling lower spread to Zero for DogecoinBreaking: Skilling lower spread to Zero for Dogecoin
    Friday, 30 Sep 2022 1:27 pm
    One of Scandinavia's favourite cryptocurrency brokers that offer Dogecoin CFDs, just gone out with a new announcement. They are lowering the spread to zero for all Dogecoin CFD transactions, making competing crypto CFD brokers angry. The only crypto pair with Dogecoin that Skilling (see review) got is DOGE/USD, tradable as a CFD. While many cryptocurrencies are going down in lately, Dogecoin is one of few that has been showing signs that a upward price breakout is possible. In the beginning of the week, DOGE increased 18%, following a long period of declining prices. Still, many crypto pessimists believe that this top rated meme coin should continue down. What do you think will happen with DOGE? Register to go either long or short with Skilling here!...
    Read the full newsflash

New Casino Reviews
New Crypto Casinos
Best Crypto Casinos
Recent Crypto Sites
Recent Crypto Coins
  • Shuffle logo
     Shuffle
    ETHEREUM-TOKEN
  • Maker logo
     Maker
    ETHEREUM-TOKEN
  • Mantle logo
     Mantle
    ETHEREUM-TOKEN
Keep up to date with
 

Our Newsletter

Sign up to our newsletter to get the
latest crypto news, new casinos,
bonus offers and other exciting
exclusives.
* indicates required
CryptoLists.com
Copyright © 2019-2022, by Crypto Lists Ltd (CryptoLists.com). Company name: Crypto Lists Limited. Address: 5 Upper Montagu Street, LONDON W1H 2AG, England.
Jump to top