Proof-of-Work vs Proof-of-Stake: How do they differ?
by Arnab Dey Investing Published on: 27 January 2022 Last Updated on: 06 April 2022
All cryptocurrencies may be similar in various aspects. However, though they may all utilize the blockchain, they have several differences in terms of how they work and also according to their purposes.
Proof-of-Work(POW)
As cryptocurrencies are known to have been run by encryption and algorithms, the mechanism of the proof-of-work technology is considered secure and efficient. However, when Ethereum Classic became a target of hacking in 2020, its vulnerability was exposed and has proven that the PoW network mechanism was somehow penetrable.
Although Bitcoin’s PoW mechanism has never been hacked, experts say that it is still vulnerable to attacks by 51%. Another thing is that Bitcoin has become a subject of criticism due to its energy consumption.
This is where the Proof-of-Stake mechanism has entered the scene and gained popularity.
PoS is known to be more energy-efficient compared to PoS mechanisms as there is no need for heavy machinery in order to create and validate new blocks. However, PoS also has its own weaknesses and is also vulnerable like its predecessor.
What is PoW? What are its security loopholes?
- The concept of the Proof-of-Work mechanism was created and introduced in 2004 by Hal Finney. However, it was Satoshi Nakamoto who first executed the concept in 2009 through the Bitcoin network. The purpose of the said consensus mechanism is to allow miners to verify transactions, creating new blocks on the blockchain. The whole system works in a decentralized manner. Decentralization ensures that the network cannot be cheated and that there is no double-spending of cryptocurrencies on the network of a public distributed ledger.
What is Proof-of-Stake?
The proof-of-stake was designed as a substitute or alternative to the Proof-of-Work mechanism, in which security features can sometimes be vulnerable to attacks.
- In the proof-of-stake technology, a user can only validate and may block transactions depending on the number of coins they hold. The more coins you have, the greater the mining power.
- While proof-of-work is considered energy-consuming as it requires a great amount of power to run heavy machines that compute algorithms, on the other hand, proof-of-stake is known to be more efficient since its mining power is only based on the coins held by the user.
- Proof-of-stake is known to be more secure in terms of potential cyber-attacks.
- Bitcoin runs proof of work mechanism instead of proof of stake.
Could Bitcoin change to proof-of-stake?
Whether Bitcoin could transition to proof of stake is still a subject of debate, especially for those users who have already put their efforts and time into investing or mining in the long run. The transition could lead to major technical challenges and could be disadvantageous to Bitcoin users.
But according to Bitcoin Suisse, there might be a possibility that Bitcoin will transition to proof of stake in the future. If all this information sparked interest in crypto trading, feel free to try it out at Yuan Pay Group.
The Bottomline
When it comes to features and advantages, proof of work and proof of stake differ in so many factors. While proof of work is considered unsustainable in terms of mining power, proof of stake is considered more environmentally friendly as it relies on the number of coins a user holds.
As of June 29, 2021, the energy consumption of Bitcoin has reached an average of 132.5 terawatt-hours every year. This is one of the reasons why the said cryptocurrency is often criticized by environmentalists.
In terms of network attacks, proof of work is known to be more vulnerable, as proven by what occurred in Ethereum Classic in 2020. There is such a thing as the Tragedy of Commons where in the future, there will be fewer Bitcoin miners since the supply of the currency is only limited.
Fewer miners lead to vulnerability of attacks by 51%. Hence, the proof of stake aims to avoid this kind of tragedy. In PoS, it would be almost impossible to obtain 51% of the cryptocurrency to make it vulnerable, especially those coins that are reputable.
Alternative coins such as Cardano(ADA), Tezos(XTZ), Algorand(ALG), and PIVX are common examples of cryptocurrencies that utilize the proof of stake network.
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