Proof-of-Work vs Proof-of-Stake in 3 minutes
What is a consensus mechanism?
In traditional databases, a few “trusted” people have permission to update and verify information. At a very high level, blockchains are global, decentralized databases where many people have their own copy of the database. Anyone can propose changes and everyone has access to the information. Because many people have a copy of the database, we need a way to make sure information is added in the right order and that everyone agrees on the state of the database. This is done by using something called a consensus mechanism. Consensus mechanisms are used to validate transactions so that everyone knows who owns what as the ownership of digital goods gets transferred between people and new information is added to the blockchain.
Proof-of-Work and Proof-of-Stake as consensus mechanisms
What is Proof-of-Work?
In blockchains, blocks of data are chained together to form the database. When new information needs to be added to the database, they are added in blocks. Because blockchains are decentralized with no single entity in charge, we need a way to achieve consensus around the data being added to the blockchain. Bitcoin is probably the most well-known cryptocurrency that uses blockchain technology with a Proof-of-Work (POW) consensus mechanism. In POW, miners compete to solve a complex math problem using brute force. Once a miner solves the problem, they get to validate the block of data that needs to be added. Then, the rest of the miners verify the answer and add that block to their databases as well. These complex problems are hard to solve, but easy to verify. Mining is a guessing game. All the miners try to guess a block’s password to add it to the chain. All this guessing takes a lot of processing power. The more processing power a miner has, the faster they can guess, which increases the chances that the miner will get to the answer first. One disadvantage of POW is that all miners are competing against each other to validate the block and it can be a huge waste of energy. Only the miner who guesses the correct answer in the least amount of time gets the bitcoin reward. The other miners don’t get anything.
What is Proof-of-Stake?
In Proof-of-Work, miners compete to out-mine each other which uses up a lot of processing power. On the other hand, in Proof-of-Stake, nodes are selected as the next validator through an election process. Staking is when a node uses the cryptocurrency they already own to become a validator of the network, which gives them a chance to be chosen to validate the next block. A node has to stake, or lock up, some of the crypto they already own to use as collateral to make sure they are following the rules and not committing fraud. If they commit fraud, they will lose some of the crypto that was originally locked up. The amount that a node has staked, and a couple of other factors, determines the chances that node is selected as the next validator. In POS, blocks are forged or minted by validators rather than mined by miners like in a POW system. This is more sustainable because in POW, all the miners competing to be the first one to guess the hash function needed to be using processing power all at the same time, even though only the fastest node gets to add the block to the network. All that other processing power by the other miners who were competing, but didn’t win, is wasted. Through an election process like POS, only the selected node uses processing power.
