Demystifying Cryptocurrency Mining: A Comparison Between Proof of Work and Proof of Stake

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Despite being such a new technology, there is a long-standing debate about the best method blockchains use to verify transactions and add them to the blockchain. The debate is between proof of work and proof of stake, and there are cryptocurrencies that use each.

Proof of What?

This process of verifying transactions and adding them to a blockchain is known as a consensus mechanism. In essence, blockchains are interconnected databases constantly trying to stay in communication with each other. To maintain accuracy all blockchains try to achieve consensus. Achieving consensus ensures that transactions on the network are all matching and therefore legitimate.

Related: What Is a “Blockchain”?

Different blockchains use different methods to achieve this consensus. However, there are two in particular that are most used, proof of work (PoW) and proof of stake (PoS). Proof of work is the consensus mechanism used by the most popular cryptocurrencies like Bitcoin and Ethereum . Proof of stake is used by well-known cryptocurrencies like Cardano , Avalanche , and Polkadot . However, these are not the only consensus mechanisms used today. Developers are continuously coming up with new ways to achieve consensus on a blockchain.

An understanding of proof of work and proof of stake helps establish foundational knowledge on the value of blockchain technology, the pros and cons of different consensus methods, and the current state of affairs in cryptocurrencies.

Miners at Work

Bitcoin, the first cryptocurrency to launch, uses proof of work. It relies on “work” done by miners. Miners are after one thing, a cryptocurrency reward. The reward is given for mining the next block of transactions. The new block of transactions becomes a part of the blockchain and is viewable by anyone with an internet connection.

In order to mine the next block and earn their reward, miners must solve extremely complex math problems. These problems are solved quickest with the help of powerful computers that run 24/7 to solve the problem associated with the next block. One of the benefits of proof of work is that less powerful computers can pool resources together to compete with the stronger computers for these rewards. This feature ensures an individual with a large amount of computing power cannot centralize block creation or act maliciously.

Validators and Staking

Proof of stake and proof of work blockchains both have the same end goal, they are just accomplished in different ways. Proof of stake blockchains utilize validators instead of miners. There are no math problems but there is still a reward. Validators “earn” the right to verify the next block of transactions by staking or “locking” their cryptocurrency for a specific amount of time.

The proof of stake consensus mechanism selects validators at random, but those validators with the most money that has been staked the longest increase their chances of creating the next block. Similar to how miners with less powerful computers can group together on proof of work, validators on proof of stake can pool their money together to compete with other validators that might have more block-creating power. This is known as a staking pool.

The Big Picture

Each consensus mechanism has advantages and disadvantages. Fans of proof of work highlight security and accessibility as benefits. The difficulty of mining the next block increases security because exorbitant amounts of time, energy, and resources would need to be used to add faulty transactions to the blockchain. It simply isn’t worth the time or energy. In addition, proof of work advocates would argue that proof of stake is less decentralized since it concentrates the creation of blocks amongst those with the most money. Because proof of work miners only need an internet connection to earn rewards, block creation is more distributed.

Those vying for proof of stake have good reason to believe proof of work might become a thing of the past. Proof of work requires large amounts of time and energy to create the next block. As a result, transactions can be painfully slow compared to proof of stake mechanisms. In addition, the transaction fees are considerably less than those on proof of work blockchains.

This combination is highlighted as one of the main reasons the Ethereum network is transitioning to proof of stake. Known as Ethereum 2.0 , the proof of stake mechanism will allow the Ethereum blockchain to handle increased traffic that has come with a wave of new users in recent years without having to rely on a Layer 2 solution .

Proof of work versus proof of stake is an age-old debate in the world of blockchains. Realize that there are strengths and weaknesses of both. This debate will likely evolve with time just as blockchains do. Without proof of work, there would not be proof of stake. And without proof of stake, newer blockchains would not be developing alternative methods that help serve the shifting demands of cryptocurrency users.

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Demystifying Cryptocurrency Mining: A Comparison Between Proof of Work and Proof of Stake