Proof of Work vs. Proof of Stake

Proof of Work and Proof of Stake are two of the leading consensus mechanisms cryptocurrencies use to verify transactions. Users who engage in a Proof of Work system contribute to transaction verification by sending cryptographic proof that they expended computational efforts. To elaborate, a network participant would use a computer to solve complex math equations in a pool of other computers solving that equations. The first computer to solve that equation is rewarded with a fee and gets to be the one to update the blockchain with the latest transactions. The higher the hash rate (compute power) you possess, the higher your chances of solving the equation first. Initially, PoW was created in the 90s to mitigate Denial of service attacks. Hal Finney later improved on it by creating RPoW, known as Reusable Proof of Work, used in cryptocurrencies such as Bitcoin. Since Proof of Work is older than Proof of Stake, most cryptocurrencies use it. 

In comparison, Proof of Stake requires users to offer their coins as collateral to prove that they are a part of the network and verify transactions. To elaborate, a network participant who stakes their cryptocurrency enters a pool of network validators; a validator is then randomly selected to update the blockchain with the latest transactions and collect a fee. The higher the amount of cryptocurrency staked, the higher your chances of being selected as a validator. Cryptocurrencies such as Solana, Cardano, and Algorand currently use Proof of Stake as the consensus mechanism to secure their blockchains. The Ethereum 2.0 upgrade is supposed to migrate its network from Proof of Work to Proof of Stake.

Both PoW and PoS are essential for securing a cryptocurrency’s network. Both are versions of the same consensus mechanism that solves the double-spend problem which arises when not using a central entity to verify transactions. In basic terms, both systems decide which transaction is real and which ones are fake.

One of the advantages of the PoW consensus is that when a coin’s fiat value increases, more users are drawn to be network contributors as the reward is paid in crypto, thus increasing the network’s security and decentralization. As the network grows, it becomes increasingly challenging for an entity to interfere with the blockchain. A glaring disadvantage to PoW is the inherent environmental effect caused by running such amounts of computing power.

While the PoS consensus doesn’t suffer from the same environmental issues as PoW, it does suffer from a centralization issue, as people with deep pockets can influence the chain governance. Another disadvantage of using PoS over PoW is the partial loss of staked funds if your validator node goes offline or you validate a malicious block. At the same time, if the same happened in PoW, the only loss is that of the computational power used. With technology change, new consensus mechanisms are being tested and put into play.