You have probably heard of the terms ‘proof-of-stake’ and ‘proof-of-work’ used in the cryptocurrency industry. Both of these terms define a type of method or algorithm used to validate cryptocurrency transactions and maintain the security of the blockchain. They are also called consensus mechanisms.
Their actual function can be difficult to understand, though. You may be wondering what the differences between the two are - if one is better than the other, and why they are important. This all depends on the role you want to take in trading or mining crypto. Based on that, both algorithms have pros and cons.
We did a deep dive into each algorithm and created a guide that defines and explains proof-of-stake and proof-of-work in clear terms. We will also compare how the methods compare to each other and answer some frequently asked questions.
To summarize, the key elements of proof of work are:
We have already established that proof-of-work is a type of consensus mechanism, but what does that mean? A consensus mechanism in crypto is several protocols that work together to ensure that the nodes (or blocks) in the blockchain are synchronized correctly.
A consensus mechanism does this by making sure all the nodes ‘agree’ with each other on the new information in a new block being added to the chain. A new block in the blockchain means that a transaction of cryptocurrency has occurred. If the blockchain is correctly synchronized, then the transaction is validated and made official.
Proof-of-work is an older method than proof-of-stake. It was first created in 1993 by computer scientists Moni Naor and Cynthia Dwork. They created the algorithm to protect a network against spam attacks.
It is used in the Bitcoin blockchain and is often referred to as ‘mining’. Mining is one way you can increase the number of Bitcoins you own. A miner uses proof-of-work to solve a mathematical problem that unearths a new Bitcoin block.
This puzzle is a hashing algorithm, or simply a hash, which is a 64-digit or 256-bit hexadecimal number. The Bitcoin block is essentially locked behind this hash, and a setup of specific hardware and software is used to solve the hashing algorithm. This can take days or even weeks, depending on the setup you have.
Mining can also be called validating blocks. Proof-of-work shows that the miner (or group of miners) has put in the time and energy to find and add a genuine block of new transactions to the blockchain.
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This method makes fraudulent transactions very difficult to pull off. A miner who wants to add counterfeit blocks would have to spend a huge amount of money on their setup and electricity to run it. Then, they would have to find unauthentic blocks and try to add them to the blockchain.
The proof-of-work system would do an internal audit to check that every block’s data matches the new block’s. The mechanism would immediately notice that the new block is not synchronized to the chain, and stop the transaction.
To successfully add a counterfeit node to the blockchain, the bad actor would have to gain a hold of over 50% of the entire network. This is impossible for one person to do, and incredibly difficult for a large group (like a government) to attain.
Even if 51% of the network and mining system were overtaken, real users of blockchain could create a new branch. This new fork of the blockchain would be used for authentic transactions, making the counterfeit part of the chain useless.
To summarize, the key elements of proof of stake are:
Sunny Nadal and Scott Nadal created Proof-of-stake. A blockchain developer and core developer of PeerCoin. Many also suspect Scott Nadal is Satoshi Nakamoto, the mysterious developer of Bitcoin.
Validators are crypto enthusiasts who use proof-of-stake. With this method, the stake refers to how much cryptocurrency a person owns. Instead of mining for new blocks, validators volunteer to find new blocks. Ethereum is a popular cryptocurrency that uses this method.
Validators are chosen based on their stake in the cryptocurrency. Instead of spending money on special hardware, software, and electricity, validators invest financial resources and time. A person must purchase a certain amount of the currency and hold it for some time to be chosen by the system. This proves the validator's long-term investment in cryptocurrency. By spending more coins, they are also rewarded with more coins. Other validators will certify new transactions in the blockchain. Once enough validators have vouched for the transactions, the network will update and accept the changes.
Not just anyone can become a validator. In the Ethereum community, being a validator is a huge responsibility and requires significant experience and knowledge. There is also a minimum stake required, in Ethereum, this is 32 ETH (which is valued at nearly 34,000 USD at the time of writing).
A validator also has to make sure their node is always online and they only vouch for authentic transactions, or they could lose some of their stakes. This is referred to as "slashing."
There are advantages to being a validator in a proof-of-stake system, though! Unlike proof-of-work, where there is no guarantee a miner will find new blocks, proof-of-stake awards every validator in the system in proportion to their stake. It is possible to try to undermine this system of validation as well. Bad actors would need to own at least 51% of the cryptocurrency’s stake. They would also need control of over half of the nodes in the network.
There are pros and cons to both proof-of-stake and proof-of-work. We can compare the advantages and disadvantages of each consensus mechanism to determine which might be better for you.
Proof-of-work is the tried and true method of keeping a blockchain secure. It has more credibility due to its long history and can ensure decentralization. In the Bitcoin blockchain, proof-of-work kept the network secure during two instances of downtime due to software updates. The network is also incredibly difficult to attack, as mentioned above.
Proof-of-work encourages competition among miners. Miners can form groups to have increased power. The competition also breeds a larger drive to improve the hardware and software that already exists. This could lead to more breakthroughs in cryptocurrency technology.
Improved technology means that energy consumption can become more eco-friendly. Renewable energies that have a lower cost are most appealing for mining, as they are also cost-efficient.
Trapped energy in other areas goes towards mining and reaps a significant reward. Two of China’s provinces, Sichuan and Yunnan, did just this. These regions create an excess of hydroelectric power during monsoon season but are now able to use it for producing cryptocurrency.
Unfortunately, the amount of electricity needed to run a mining operation is incredibly high. Even though most miners use renewable energy, you can expect a hefty electricity bill.
Like with electricity, this requires a lot of hardware. This produces a lot of electronic waste, which has a negative environmental impact.
Decentralization is one of the most appealing characteristics of cryptocurrency, but some countries could undermine it with regulations. If crypto mining became strictly monitored, it would hurt the value of the currency.
The proof-of-stake system operates with much less energy consumption. You also do not need an extensive setup, as you can join this system with a high-quality laptop or PC.
The process of receiving and sending crypto with this system is also faster. you save time waiting for node validation. Like with mining.
Proof-of-stake requires a validator to hold a significant stake, and a bad actor who attacks the blockchain by trying to create a fork would lose this stake. This method hugely deters attacks. It is also much harder to censor and monitor by central authorities, as a validator can operate from any location on a singular device.
Suggested reading: Staking Crypto: Ultimate Guide
Proof-of-authority(PoA) is another up-and-coming consensus mechanism. Ethereum Azure Blockchain Service and the VeChain blockchain currently use PoA. Ethereum co-founder Gavin Wood was the first to invent PoA in 2017. Similar to proof-of-stake, proof-of-authority users are validators. These validators are system moderators who monitor software that creates and organizes new blocks of transactions.
A person is only approved as a validator after a thorough inspection process. They have to stake financial resources as well as their reputation and prove they are committed long-term. Their identities are open to the public, so they need to pass a background check with flying colors. Reputation is critical to proof of authority, and community is a valuable aspect of the system. Validators who process transactions at a stable rate earn a well-respected position, and they are responsible for maintaining the security and integrity of the network.
There are upsides and downsides to proof-of-authority, just like with our other consensus mechanism. One advantage of proof-of-authority is a larger capability to process transactions with less computational or technological resources needed. On the other hand, this system is not considered decentralized.
Another con is the potential for blacklisting or censorship. With all the validators’ real identities publicly available, it would not be difficult to censor or manipulate them.
Proof-of-stake does solve some of the issues that occur with proof-of-work. It is more energy-efficient and can process transactions at a faster rate. Future cryptocurrency platforms will most likely continue to look to proof-of-stake for solutions and innovation, but it will not replace proof-of-work. This is because the two networks can be used more efficiently for their purposes.
At the time of writing, crypto experts consider proof-of-work more secure than proof-of-stake. However, this might not always be the case. Proof-of-stake is more scalable than proof-of-work as it does not have as many hardware limitations. As the system grows, it could potentially become more secure than proof-of-work.
In short, yes. Staking crypto is worth it. However, it really depends where you stake your crypto. Not all platforms are safe and most of them are very complex to use. Just a reminder that YouHodler combines the user-friendly abilities of traditional finance with the wealth-generating potential of cryptocurrency and DeFi. What you get with us is the same benefit of staking crypto on other platforms without all the mess.