Bitcoin is a worldwide success and much of its value is because virtual currencies dispense intermediaries when it comes to transactions. That is, you don’t have to resort to a traditional financial institution to validate your operations. Everything is done in the blockchain technology itself, through tools known as consensus mechanisms. These include Proof of Work and Proof of Stake, which we’ll talk about in this post
Using this mechanism, groups of people in different geographic locations can conduct financial transactions in a secure and agile manner. In this article, we will cover the following topics:
- What is Proof of Work (PoW)?
- What is Proof of Stake (PoS)?
- How to choose between Proof of Work and Proof of Stake?
1. What is Proof of Work (PoW)?
The best-known form of mining in the cryptocurrency world is PoW, used in the most famous of them all, Bitcoin. The procedures involve creating a new valid Blockchain block (a kind of digital record) and miners are employed to validate and authenticate transactions.
For it to be accepted by other machines connected to the network, one must prove that the mathematical challenges imposed were solved by the user. Hence, the name “proof of work”.
PoW is also known for its high power consumption. That is the main reason why mining often occurs in countries that practice lower rates of electricity. To more accurately exemplify PoW, we may cite a college exam.
Let’s assume the subject is math and this test involves many other students. The first who can solve the problem will be rewarded. However, it is not only necessary to announce the right answer: it is also necessary to review the entire solution used to get to the solution.
Thus we can relate these procedures to PoW. This is because, in addition to being a “proof of work”, the user who proves to have the most processing power on their machines is more likely to be able to mine the next block – such as the student with the most intellectual ability to solve that exam right now.
When it comes to cryptocurrencies, those who provide the most evidence of this work will be most rewarded. The idea behind this model is to ensure that those who actually participate in the network are valued more.
All this implies the purchase of robust hardware equipment to do better than competitors. The most well-known cryptocurrencies using PoW are Bitcoin, Ethereum (we’ll talk about it later) and Litecoin.
2. What is Proof of Stake (PoS)?
In this type of mechanism, what really matters is the final amount of coins the user has in his or her wallet. The higher this number, the higher your stake in the Cryptocurrency Blockchain as a whole. Thus, we have an explanation of the term “proof of stake”. It is with each stake that users compete against each other to forge entirely new blocks.
Here the most appropriate term is not mining but validation. Those responsible for this work are chosen mainly based on the number of coins they already hold, taking into account also the time of ownership.
Besides, they are elected by some pre-established rules to properly validate transactions on the network and develop (“forge”) the next block of this Blockchain. Rewards in the Proof of Stake model are received through fees passed on to each transaction. It is important to note that no additional coins are received.
Its main advantages involve reducing the energy consumption of the blockchain of a given currency. EOS, Stellar and Cardano are some of the examples of cryptocurrencies that operate on the Proof of Stake model.
3. How to choose between Proof of Work and Proof of Stake?
This issue generates heated discussions in the world of cryptocurrencies. In terms of security, both standout, since the operations are carried out with great transparency, in general. However, many people claim that PoS has a subtle superiority in this regard.
This is explained by the fact that a hacker would need to acquire at least 51% of the amount of all virtual currencies to be successful in his or her attack. In the PoW model, it would have to possess at least 51% of all the computational processing power of the network.
Regarding centralization, PoW stands out, as it generates a high concentration of computational processing in farms, or mining farms – some of the most famous are in countries such as China, the United States, Russia, and Iceland.
In the case of PoS, many users find it easier to fight directly for the reward, as in most cases it is cheaper to buy a certain amount of coins and participate with that bet by investing in robust hardware to perform the proper mining process.
However, it is important to remember that to set up a broad operation involving DASH coins, for example, it requires as much investment as that spent to purchase hardware equipment.
This way, people with larger amounts of coins (popularly known as whales) take advantage of the PoS model.
Another point where PoS stands out is considerably low energy consumption. This is because the competition is not held by the general processing power, but relates to the exact amount of coins.
As a result, the level of electricity required to keep the entire operation working properly is lower. No wonder options as reputable as Ethereum have shown increasing enthusiasm for migrating to PoS.
We can say that the dispute between the models is still quite fierce and only time will tell who will definitely win the battle.
As we can see in the post, consensus mechanisms like Proof of Work and Proof of Stake are powerful tools for enabling direct transactions and cryptocurrency mining without the need for intermediaries. They give greater autonomy to operations among Bitcoin enthusiasts, Ethereum and many other options.