What is Proof of stake? How does it differ from Proof of work?
You must have heard that cryptocurrencies use an enormous amount of energy to secure their networks. You must be wondering why cryptocurrencies use electricity, and on top of that, what are the alternative options? If you are interested in knowing which one is better, stick right until the end because you will surely get your answers.
Proof of stake V/S Proof of work: The basics
Proof of Stake and Proof of work are the consensus mechanisms required for a transaction to take place on a blockchain. These models eliminate the need for a third party in the process.
Proof of work: Introduction
The idea was first introduced in 1993 to combat spam emails and was called “proof of work” later on. However, the technique wasn’t used until Satoshi Nakamoto created Bitcoin in 2009. He needed a way for transactions to happen without a third party. He achieved this when he created the Proof of work system. Satoshi used this system as a way to secure the Bitcoin blockchain.
Proof work works by having all nodes solve a cryptographic puzzle. This is what happens behind the scenes.
- Miners solve the puzzle
- The first one to solve gets a mining reward
- Better the equipment better the reward
Proof of work cryptography uses difficult mathematical equations that only powerful computers can solve. So the people with better equipment get better rewards. This system results in a few issues.
- Encourages high energy usage
- It makes the blockchain more centralized rather than decentralized
Proof of stake: Introduction
To solve the issue of the Proof of work system, a new consensus algorithm is required that we get in the form of Proof of stake. This model was created in 2012 and is currently being adopted by Ethereum, the second most popular cryptocurrency. Instead of letting everyone compete against each other, this system randomly uses one node to forge the next block.
In this system, the minors are called validators, and they have to deposit a certain amount of coins as a stake into the network to get chosen. The higher the deposited amount, the higher is the chance of getting selected.
When a node is selected to validate the next block, he will check if all the block transactions are valid. And if so, the node adds it to the blockchain. And as a reward, the node receives the fees that are associated with each transaction. But here comes the problem, validators are prone to lose their stake if they approve a fraudulent transaction. So he needs to be careful.
- Energy use: Proof of stake doesn’t let everyone mine for new blocks; thus uses considerably less energy while Proof of work uses more energy.
- Decentralization: The Proof of stake system is also more decentralized because people team up to form mining pools and increase their chances of mining a new block in Proof of work.
- Cost of setting up a node: In a proof of stake system, setting up a node is less expensive because you don’t need expensive mining equipment, unlike the Proof of work system.
- Approving fake transactions: In the Proof of work system, if 51% of minors have the hashing power, they can control the blockchain and approve fake transactions. However, this 51% attack is less likely to happen in Proof of stake.
The original adopter of Proof of work is Bitcoin, besides Ethereum also uses this system though it is moving to Proof of stake. On the other hand, other popular cryptocurrencies using the Proof of stake system are NEO, Dash, Cosmos, EOS etc. It is clear that Proof of stake is future Proof and is forwarding the blockchain technology with less energy usage and being more decentralized.