Proof of Work (POW) vs Proof of Stake (POS): How are these Consensus Mechanisms Different?

We all know now that the market of cryptocurrencies is extremely viable, and here to stay. Crypto assets bring with them a range of benefits and work, which even fiat currencies lack. These advantages give cryptocurrencies an edge over other asset classes.

Cryptocurrency is built on a blockchain. As the word itself suggests is a chain of blocks that holds information and acts as a common public ledger. It serves to record transactions and safeguard this information by making it almost impossible to tamper with. One of the greatest advantages of crypto is its decentralized nature.

The asset class works without the involvement of an arbitrator or intermediary body. In such a setting, it is essential to have in place certain measures that will make sure that the entire ecosystem runs smoothly and without any hurdles. That is where we have consensus mechanisms. A consensus mechanism is used in a decentralized system, such as a cryptocurrency network, to ensure that all participants agree on the current state of the system.

The mechanisms in place for decentralized Finance protocols are of two kinds, Proof of Work and Proof of Stake. In this article, we will be discussing the details of these mechanisms and the pros and cons of each of them.

What is a Consensus Mechanism and why do we need it?

First, it is important to get our basics right before we even try to understand both Proof of Stake and Proof of Work, respectively. A consensus mechanism is a protocol that helps to achieve agreement on a single data value among distributed processes or systems. In a blockchain network, consensus mechanisms ensure that all nodes on the network have a copy of the same ledger. They also guarantee that the addition of new transactions is in a secure and efficient manner.

In the absence of a consensus mechanism, it would become very difficult to maintain the integrity and security of the network. One of the main reasons we need a consensus mechanism in a cryptocurrency or blockchain network is because prevents double-spending.

Without a consensus mechanism, it would be possible for a malicious actor to spend the same cryptocurrency multiple times. This would lead to inflation and undermine the integrity of the network. A consensus mechanism ensures that each transaction is valid and that the ledger is accurate and up-to-date.

In addition to preventing double-spending, consensus mechanisms also play a critical role in maintaining the security and decentralization of the network.

What is Proof of Work?

Of the two major consensus mechanisms in the market today, Proof of Work is a rather older alternative. It was commonly in use in the nineteen nineties but only found massive acceptance in the crypto space somewhere at the beginning of the 2000s. Proof of Work is largely based on the concept of computational power.

All devices that are working on a common network have to approve a particular transaction. Only when this happens,  a transaction is added to the history of the blockchain as a new block. Bitcoin is the most prominent name among those using the Proof of Work mechanism.

Other blockchains employing PoW include Bitcoin Cash, Dogecoin, Monero, and Litecoin.

How does proof of work function?

For proof of work, only certain users have to solve crypto-graphical puzzles. These puzzles are mostly fundamentally mathematical. When the individual solves the puzzle; the transaction is verified. This process of solving complex mathematical problems, validating transactions and adding new blocks to the blockchain is mining.

These nodes or users that perform it are miners. Once a miner solves the problem, they get a certain number of cryptocurrency tokens as a reward. This incentivizes them to continue participating in the network.

What are the Benefits of Proof of Work

The main advantage of PoW is that it is highly secure. It requires a significant amount of computational power to solve a mathematical problem and validate transactions. Some more perks of the mechanism are as follows

• Efficiently supports The core characteristics of the blockchain-like decentralization and security.
• As and when a cryptocurrency grows in popularity, more miners become associated with it, which in turn enhances the security further
• When processing power grows, the risk of hacking or malicious penetration reduces
• It mitigates Forking risks more efficiently and hence miners have the incentive to make decisions that serve to be better for the network.

What are the Disadvantages of Proof of Work

Proof of Work creates an alarming carbon footprint as it needs a massive amount of energy to work and prosper.

• Scalability becomes a problem which in turn transitions fees slower
• When a network on Proof of work grows, transaction fees tend to increase too.
• It can cause a concentration of mining power in the hands of a few large mining pools, which can make the network less decentralized.

What is Proof of Stake?

Proof of Stake as a consensus mechanism aims at alleviating the many shortcomings of Proof of Work. In PoS, instead of using computational power to validate transactions and create new blocks. The choice of Nodes who validate transactions and create new blocks is on the basis of the amount of cryptocurrency they hold and are willing to “stake” as collateral.

Proof of Stake has recently gained popularity and blockchains like Polkadot, Avalanche, and Cardano are using it today.

How does proof of stake function?

The process of PoS begins with the selection of a validator, who will validate transactions and create new blocks. The more cryptocurrency a node holds, the higher the chance of them qualifying as a validator. This process is forging and the nodes that perform it are forgers.

Also Read: A Beginners’ Guide On Using Crypto

After the selection, they validate transactions by approving that they are valid. Once a certain number of validators have verified the transaction, they then create a new block by adding these transactions to the blockchain. After adding the block the validator gets a reward of a certain number of cryptocurrency tokens. This works as an incentive for their participation in the network.

What are the Benefits of Proof of Stake?

The main advantage of PoS over PoW is that it is more energy-efficient because it does not require a significant amount of computational power. Also, more nodes are created leading to enhancing security even more.

• It tends to be more decentralized because it does not require a large investment in specialized hardware to participate in the network.
• It creates a very little carbon footprint
• Scalability and speedy transactions are achievable with Proof of Stake
• It Provides an additional security layer to the network. A malicious actor would need to acquire a large amount of the cryptocurrency to have a significant chance of selection as a validator, making it less likely for them to attack the network.

What are the Disadvantages of Proof of Stake

• A lot of controlling power is in the hands of token holders
• The risk of forking becomes more looming
• Validators can validate multiple chains without any financial penalty, which can lead to a lack of consensus on the true state of the blockchain.

What are the major differences between Proof of Work and Proof of Stake?

The most highlighting point of difference between Proof of Work and Proof of Stake is the difference in energy consumption. While the former has a huge negative impact on the environment, the latter is more conscious of the same.

Secondly, the working of both mechanisms is different. In Proof of Work, miners compete to solve complex mathematical problems to validate transactions and create new blocks. On the other hand, in Proof of Stake, the selection of validators happens randomly with the chance of selection being proportionate to the amount of stake held.

Proof of Work miners gain block rewards, whereas Validators on Proof of Stake get rewards in the form of network fees. In a Proof of Work system, discouraging of any malicious activity is through the cost of computing power and the time it takes to carry out the attack.

This cost serves as a deterrent for would-be attackers. On the other hand, in a Proof of Stake system, validators are chosen based on the number of crypto-tokens they hold as collateral. These staked tokens serve as a guarantee that the validators will not engage in any activity that could harm the blockchain. Doing otherwise could result in them losing some of their staked funds.