These days every payment platform needs to make sure all transactions are legitimate and no one spends the same money twice. On centralised platforms like Visa and Mastercard, this is done by the central authority. But when there is no central authority like on a blockchain, consensus mechanisms come into the picture. The two most popular mechanisms you may have heard of are Proof of Work (PoW) and Proof of Stake (PoS). But are you aware of the distinctions between the two? What is the better option in proof of stake vs. proof of work? Let’s understand the terms and how they are different from each other.
Proof of Work: What, Why, and How?
Proof of work is the oldest blockchain consensus mechanism. First implemented with Bitcoin, it is closely related to mining. In case you’re wondering, proof of work is a blockchain concept. It is the process of using a large amount of computation power to solve a problem. All miners on the blockchain race to solve a maths puzzle using their computers. The first one to solve it is rewarded with crypto and is able to update the blockchain with a new transaction.
This mechanism can be a powerful tool for validating a transaction. The number of miners increases together with the value of the crypto asset. Because of the large number of miners contributing their computing power, no individual has the capacity to alter a blockchain. This is a tried and tested method that has seen many other adopters such as Ethereum 1.0 (ETH), Monero (XMR), and Litecoin (LTC).
On the other hand, proof of work consumes a lot of resources and energy. Since you need to have a lot of processing power, you also need a lot of energy. According to estimates, more energy is utilised to generate Bitcoin than is consumed by several nations. This introduces even more problems with expansion. If you want smart contracts or NFTs powered by Bitcoin, then you’re out of luck. Proof of work prevents bitcoin smart contracts from being economically viable.
What is Proof of Stake?
What if you want a mechanism that can securely verify transactions, while also supporting smart contracts, DeFi and NFTs? Proof of stake is useful in this situation. It was developed when it became clear that proof of work would not be sustainable for scaling a blockchain to keep up with demand. So how does proof of stake work?
Instead of mining, proof of stake uses staking. While the method of staking can vary between blockchains, they all have a network of validators who “stake” their crypto for a chance to update the blockchain and earn more rewards. This method rewards those validators who have the most investment in the blockchain.
The network selects a winner based on the quantity of crypto assets staked and the length of time it has been staked. The chosen winner then verifies the most recent blockchain transaction. After this, other validators verify – or attest – that the transaction is accurate. Once a threshold of validation is reached, all participating validators receive rewards proportional to their stake.
This sounds great, but what are the downsides? One major issue is that proof of stake incentivizes hoarding crypto. Investing in a token and staking it gives you more rewards, so naturally, you would want to stake as much as you can. In some cases, this can lead to more centralization of the blockchain.
How are they Different?
How does Proof of Stake change the Ethereum Blockchain?
With Ethereum Merge right around the corner, a lot is being discussed about what this upgrade can do. The Merge upgrade is going to transition Ethereum from a Proof of Work (POW) consensus mechanism to a Proof of Stake (POS) consensus mechanism. A few ways in which POS improves the ETH Blockchain are mentioned below
- Proof of stake is going to make the Ethereum blockchain much more scalable, and efficient
- It acts as a stepping stone for the upcoming Ethereum upgrades such as Sharding. Sharding is going to speed up the transaction throughput of the Ethereum blockchain from the current rate of 25 transactions per second to roughly 100,000 transactions per second as per Vitalik Buterin
- More apps are estimated to be built on ETH after the merge because of the higher efficiency of POS.
- The transition is going to reduce the energy consumption of the blockchain by a whopping 99.5%
- The Annual percentage returns (APR) through staking are estimated to increase to approximately 7% as per the Ethereum community
Read more: What is the Ethereum Merge
If you’re like us, you know crypto-assets can bring about a bright future. The economies of the future will require both proof of work and proof of stake. Proof of work offers a method to obtain rewards with little investment into specific digital assets. However, for economies driven by blockchain in every domain, proof of stake seems to be the way to go. Proof of Stake also makes the entire Crypto earning experience more scalable and efficient.