PoW vs PoS Crypto: What’s the Difference?

Consensus mechanisms such as proof of work or proof of stake ensure the integrity of blockchain networks by providing a reliable and transparent system to reach a network consensus on the state of the network without the need for a central authority.

In this guide, you will explore the difference between these two consensus mechanisms while also understanding each of them individually

Proof of Work vs Proof of Stake: Understanding the Difference

Proof of stake and proof of work are consensus mechanisms that aim to ensure that all the transactions being added to the block are genuine and every node in the network is on the same page. These mechanisms empower peer-to-peer networks like blockchain to make decisions and govern themselves without the need for a central authority.

Both mechanisms follow a similar pattern of picking someone in charge and validating — the difference comes in how these key nodes are selected, validation, the quantum of energy consumption, and many other factors as listed in the table below:

What Is a Consensus Mechanism?

A centralized database is stored, located, and maintained in a single location. A dedicated administrator, or a group, regulates the database and makes sure that all information is correct and up-to-date.

An administrator at a hospital, for example, holds full access to all patient information, such as their healthcare activity, prescribed medicine, or outstanding debts. Theoretically, it is possible to tamper with the data and enter a random value like 100,000 USD in debt against a certain patient’s name or completely erase some of the records from the directory.

On the other side, a decentralized ledger like a blockchain is self-governing. It distributes the authority of entering and authenticating data to all of the participants in the network. Depending on the type of network, all participants maintain a log of their own and have full access to the entirety of the distributed ledger.

To ensure that they are all on the same page and that every transaction entered is genuine, a network requires a reliable, real-time, and transparent mechanism. This is where the consensus mechanism fills in the gap.

They constitute a complete stack of ideas, protocols, and incentives that allow participants, or nodes, of a blockchain network to have an agreement on the state of the network. The consensus mechanism establishes reliability and trust in the blockchain network.

What Is Proof of Work?

Proof of work is the very first consensus mechanism launched in 2009 along with the very first cryptocurrency Bitcoin.

In a blockchain, as the name suggests, the information (within the context of cryptocurrencies, the transaction data) is stored in blocks that are tied together in a chronological fashion via cryptography.

Besides the data, each block contains its own and the previous block’s hash. The process of verifying transactions and adding a valid block to the chain is called mining. For miners to authenticate blocks, they need to generate a valid hash

It’s not too difficult for a computer to generate any hash from a given set of data. In order to assess the work, the networks create a “target” hash. The correct hash that will validate a block must match the target hash for the current block.

This requires a significant amount of computational power (GPUs), and due to the demanding nature of the authenticating work, it becomes the proof-of-work. This way, other nodes in the network recognize the validity of transactions and are kept up-to-date about the status quo of the ledger.

In order to incentivize mining, blockchain networks like Bitcoin created a block reward program where successful miners are compensated with a certain amount of associated cryptocurrency for their contribution.

Today, there are full-blown mining farms that are essentially warehouses filled with dozens of GPUs, large power supplies, cooling mechanisms, and other hardware to power mining computers.

What Is Proof of Stake?

In this consensus mechanism, validators do not solve the mathematical puzzle to create a block. Instead, they need to stake a certain amount of crypto capital into the smart contract and are randomly selected thereafter. The staked funds act as a security deposit, as validators can be fined through it should they verify fake transactions or do not carry out their duty satisfactorily.

Interestingly, there’s a terminology change in this system. The validators, not miners, forge or mint new blocks, instead of mining. The validators are chosen depending on the size of their stakes: if person X deposits 100 USD, they have a higher chance of becoming the next validator than the Y person who deposited only 10 USD.

After a validator is chosen, they check whether all the transactions within a block are valid, and if everything is correct, they add it to the blockchain. As a block reward, the validator receives the network fees that are associated with the transaction within the block.

The trust is ensured as long as the stake is higher than the transaction fees (block reward) the validator gets from verifying the block, as they will be losing their stakes if they act in bad faith. This is also the reason why nodes with higher stakes are prioritized.

Ethereum has recently completed the “merge” in September 2022, an upgrade that has migrated the network from the proof-of-work to the proof-of-stake consensus mechanism. The objective behind this upgrade was to render the Ethereum network energy-efficient.

Which Mechanism Is Better?

Proof of work is largely criticized for two main reasons

1. Massive energy consumption

2. Paving the way for centralization

By nature, PoW requires an enormous amount of GPUs which creates the need to build an expensive hardware setup. Result? Consumption of massive energy creates tremendous stress on the climate.

Proof Of Work system also leads to nodes coming together to form mining pools. These community members compile their computational power to increase their probability of being selected and mining a new block and thus get a reward.

These pools have the power to centralize the mining process, as can be seen in real-time in the Bitcoin space with agents such as BTC.com or AntPool dominating the majority of the network.

Should large agents combine their operations, they can control the majority (over 51%) of the network and potentially start to approve fraudulent transactions.

Why PoS Isn’t the Clear Winner?

First and foremost, it is theoretically possible for a prospective validator to buy the majority stake on a network and control the network (called the 51% attack) much like with the PoW consensus mechanism.

However, depending on the value of a cryptocurrency, this is incredibly impractical: it would cost billions of dollars to buy more than 51% of the circulating supply, making such an attack much less likely.

PoS also doesn’t require much computational power and is encouraging more people to participate as nodes and stake their holding to become validators regardless of their hardware.

Although PoS brings a solution to its counterpart’s major problems, it has drawbacks of its own. The major intrinsic problem with PoS is that the validators are selected depending on the size of their stakes.

This system allows token-rich nodes to have higher chances of becoming validators, thus collecting rewards, and thus entering with higher stakes. In a different way, it also favours the financially advantaged.

Besides the risk of creating an unequal environment, proof of stake is a much younger system than proof of work. The latter is a seasoned consensus mechanism that has been in use since the genesis of cryptocurrencies, whereas PoS has not been quite proven to be completely secure.

How the Blockchain Community Will Move Forward?

The difference between two consensus mechanisms and which one is better suited for blockchain spaces is a hotly debated issue since the introduction of proof of stake. It’s possible to find major blockchain networks using respective methods, most prominently, Bitcoin still uses PoW while Ethereum switched to PoS in September 2022.

It also needs to be said that everything surrounding blockchain technology is a work in progress — developers continue to improve the efficiency of the technology while trying to mitigate the current challenges and risks to ensure the implementation of the right decisions in the name of sustainability, security, and true decentralization.

Read More About Blockchain