Proof of Work (PoW) and Proof of Stake (PoS) are “consensus mechanisms”, algorithms that allow blockchains to function securely.
Proof-of-stake (PoS) is a method by which a blockchain of a cyber currency aims to reach a distributed consensus. In contrast, Proof of Work (PoW), also known as Proof of Work describes a system that requires computing power from the service requester to access and use it in order to deter malicious use or attacks.
Both mechanisms :
- Work by requiring potential participants to prove that they have dedicated a certain resource, such as money or energy, to the blockchain. This feature filters out those who are not genuine or committed to the network. PoW & PoS achieve the same result, and have proven their ability to successfully run blockchains, but the methods are fundamentally different.
- PoW & PoS ensure the security of blockchains by allowing only genuine users to add new transactions by creating new blocks. These are the processes at the very basis of the blockchain, which ensure its functioning. It is important to distinguish between “blocks”, which allow transactions to be recorded indelibly, and “tokens” (e.g. Bitcoin), the virtual currency attached to a given blockchain.
Proof of Work, the original mechanism
The Proof of Work is the original process of blockchains. It is the one on which Bitcoin was created, and still the one on which it operates. PoW is a system in which computers compete to be the first to solve complex puzzles. This process is commonly referred to as “mining,” as the energy and resources required to solve the puzzle are often considered the digital equivalent of the actual process of extracting precious metals from the earth.
When a miner solves this “puzzle” before the other miners, he or she is allowed to create a new block. If everything checks out, the new block is “chained” to the previous block, creating a chronological chain of transactions. The miner is then rewarded with bitcoins (or other cryptos depending on the blockchain) for providing his resources.
In other words, Proof-of-Work (PoW) requires users to run the hash algorithms multiple times by adding a random alphanumeric string to the block data until the overall fingerprint is below a given threshold.
Proof of Stake, the mechanism of the future?
In the PoS system, validators (the equivalent of miners) are chosen to generate a new block based on the number of tokens they hold rather than letting an arbitrary competition between miners determine who can add a block. Those who are chosen get tokens from that blockchain in exchange. There is no question here of requiring complex calculations from machines, so get out of the “bitcoin farms”: those whole sheds full of computers running at full power to do the calculations are useless for PoS-based blockchains.
In this system, the amount of “stake” – the amount of cryptocurrency a user holds – replaces the work done by miners. This stake structure secures the network because a potential participant must purchase the crypto-currency and hold it to be chosen to create a block. Most importantly, you don’t need to have the latest computer equipment to mine! Much to the relief of all those waiting to buy graphics cards at normal prices.
The main advantage of Proof-of-stake is that it avoids the phenomenal energy expenditure of Proof-of-Work. On the other hand, many believe that the blockchain thus forged does not have the same robustness and level of immutability of Bitcoin’s Proof-of-Work. Some research efforts focus on a hybrid Proof-of-Work/Proof-of-Stake mechanism.
Most of the problems and challenges with proof-of-stake are due to a disconnect with the real world, a problem not suffered by proof-of-work, which anchors the system in the real world with the infrastructure it requires and the energy expended.