In order to validate new transactions, add them to the blockchain, and produce new tokens, cryptocurrencies primarily use “proof of work” and “proof of stake.”
Without a middleman like Visa or PayPal, decentralized cryptocurrency networks must ensure that no one spends the same money twice. Networks use a system known as a “consensus mechanism,” which enables all the computers in a crypto network to concur on which transactions are valid, to do this.
The two main consensus processes used by cryptocurrencies to confirm new transactions, add them to the blockchain, and produce new tokens are “proof of work” and “proof of stake.” Mining is used by Proof of Work, which was invented by Bitcoin. Staking is used by proof of stake, which is used by Cardano, the ETH2 blockchain, and other systems, to accomplish the same goals.
Both have their advantages and disadvantages, but let’s see how they stack up against one another.
Proof of work is a mechanism used to verify transactions, through computer technology. It’s also the type of algorithm that can be used by digital currencies to secure their networks.
Thanks to proof of work, it is not possible for a potential hacker to hack a whole group of blocks. Let us explain: a hacker cannot defy the hash code security system by altering a whole group of blocks connected to the tampered block, in order to move back this hash code security. This is not possible because of the proof of work. This means that the duration of the proof of work is unique to a specific blockchain and it can take up to ten minutes or longer for each new block to be validated and generated. So if a hacker wants to tamper with data on a single block, they would need to alter the data on all the affected blocks within a set time frame of a number of minutes for each tampered block to be made valid. This makes altering information very difficult.
Particularly for a very basic but extremely valuable cryptocurrency like Bitcoin, proof of work has several significant advantages. It’s a tried-and-true method for keeping a decentralised blockchain safe. As a cryptocurrency’s value rises, more miners are motivated to join the network, boosting its strength and security. It becomes impossible for any person or group to interfere with the blockchain of a valuable cryptocurrency because to the amount of computing power required.
On the other hand, it’s a resource-intensive process that would have difficulties scaling to handle the enormous volume of transactions that blockchains that support smart contracts, like Ethereum, can produce. Alternatives have been created as a result, with proof of stake being the most well-liked.
What is a proof of stake?
As Ethereum-powered decentralized finance (or DeFi) protocols have grown in popularity, the blockchain has found it difficult to keep up, which has resulted in fees increasing. This is because proof of work has scalability constraints that will eventually need to be solved.
The Ethereum blockchain also has to process a wide range of DeFi transactions, stablecoin smart contracts, NFT minting and sales, and whatever innovations developers come up with in the future, in contrast to the Bitcoin blockchain, which primarily just has to process incoming and outgoing bitcoin transactions. Their solution was to create a totally new ETH2 blockchain.
Proof of stake is proven to be a speedier and less resource-intensive consensus method. Proof-of-stake consensus algorithms are used by cryptocurrencies like Cardano, Tezos, and Atmos with the aim of increasing speed and efficiency while reducing fees. As Intelly we use proof of stake and run on the Binance Smart Chain, making transfers rapid and affordable.
Generally speaking proof of stake blockchains use a network of “validators” who donate — or “stake” — their own cryptocurrency in exchange for the opportunity to potentially validate new transactions, update the blockchain, and profit.
The most invested players are practically rewarded since the network chooses a winner based on the amount of cryptocurrency each validator has in the pool and how long they have had it there.
A reward in the native cryptocurrency is given to all participating validators, and it is typically dispersed by the network in proportion to each validator’s stake.
One significant distinction between the two consensus mechanisms is energy usage. Proof-of-stake blockchains enable networks to run with significantly reduced resource consumption since they do not require miners to expend electricity on redundant processes (competing to solve the same puzzle).
Economic repercussions of both consensus processes discourage malevolent actors and penalise network disruptions. The sunk cost of processing power, energy, and time in proof of work penalises miners who submit blocks of erroneous data by imposing a penalty on them. In proof of stake, the staked crypto assets of the validators act as a financial inducement to behave in the network’s best interests. A percentage of a validator’s staked funds will be “slashed” as punishment if they accept a faulty block. The network will determine how much a validator can be reduced.
To conclude; unlike Proof of work, PoS gives people who hold large amounts of currency incentives such as interest or rewards for validating blocks on their network—but only if those blocks contain information about themselves too. A big advantage compared to PoW is that it doesn’t require nearly so much energy consumption; however, this comes at cost: decentralisation could suffer somewhat because fewer people would need to compete against each other in order to earn rewards while maintaining consensus among all peers involved.