We all come across new terms as crypto space fans. Either a passive or active user of cryptocurrencies, there are certain concepts we all should be aware of as they are core ideas of the crypto industry. Two most popular concepts in the crypto sphere are Proof of Work (PoW) and Proof of Stake (PoS), and they are referred to as blockchain consensus mechanisms.
The technical logic behind many crypto assets is based on a consensus mechanism. A consensus mechanism aims to authenticate that information added to the ledger is valid, so the network is in consensus. This process ensures that the next block contains the latest transactions on the blockchain, preventing double spending and other invalid data.
There have been some consensus mechanisms framed, each with benefits and disadvantages. They all serve the same core purpose but differ in methodology. The main difference between different consensus mechanisms is the way in which they delegate and reward the validation of transactions.
Proof of Work (PoW) is a protocol that is programmed to block cyber-attacks such as a distributed denial-of-service attack (DDoS) which can exhaust the resources of a computer system by sending multiple fake requests. The Proof of Work concept was coined long before the Bitcoin, but Satoshi Nakamoto was able to apply this mechanism and revolutionize the way traditional transactions are set. PoW is what allows trustless and distributed consensus on the network.
Even though the Proof of Work is an innovative model, it does have disadvantages. The most debated ones are the significant amounts of electricity needed to mine and the limitation in processing multiple transactions at the same time.
Proof of Stake (PoS) is still an algorithm and protocol, with a similar purpose to PoW, but it has a different way to verify and validate transactions or blocks. Proof of Stake was first coined on the Bitcointalk forum in 2011, but the first cryptocurrency to use this consensus mechanism was Peercoin in 2012. Unlike the PoW, where the algorithm rewards miners who validate transactions and create new blocks, with the PoS, the creator of a new block is chosen depending on the amount of stake (coins) and the respective age of the stake.
This method eliminates the challenges PoW faces because there is no need of expensive hardware, it is much more energy efficient than the Proof of Work protocol and a transaction’s validation is swifter. The downside of the PoS is that a small group of people owning a majority of coins will almost always be chosen as the system’s miners (forgers).
Under a Proof of Work system, a miner does not have to own any coins he/she is mining, seeking only to maximize personal profits. In a Proof of Stake system, the validator must own and support the currency he/she is verifying. Another difference between PoS and PoW is that PoS does not imply the creation of a new coin (mining) as all the coins are created in the very beginning, which results in the miners being rewarded through transaction fees as opposed to newly mined coins.
In the end, both algorithms had advantages and disadvantages, but they are keeping the smart crowd of the crypto space quite busy. One thing is sure: the progress is coming, and it’ll be the turning point for the cryptocurrency industry!