Proof-of-Work vs. Proof-of-Stake: Comparing Blockchain Consensus Algorithms

Proof of Work

Proof-of-Work (PoW) is a consensus mechanism that verifies transactions by having computers guess a very long list of letters and numbers called a hash.

Each group of transactions is called a block, and each block has a hash. The hash is like a digital signature that is used to verify transactions. 

The hash verifies transactions because it is the output of a function. This may sound complex, but it’s actually very simple. 

There are two parts here:

1. Function.
2. Output. 

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A function is a machine. A machine is a device that you put something into, and something different comes out. A woodchipper is a machine. You put wood in and tiny wood chips come out.

The stuff you put into a machine is the input and what comes out is the output. So the woodchipper is the function, the wood is the input, and the wood chips are the output. 

Machines like wood chippers are backwards-predictable. When you see woodchips, you know they used to be wood. 

But some machines are not backwards-predictable. A hash is the output of an unpredictable machine, which means that you cannot know the input just because you know the output.

This means that you have to guess the right input. Computers are able to guess very fast, so people run programs that make their computers guess hashes to try and find the right input. This is called mining. 

Once the right hash is guessed, the transaction can be confirmed. If someone confirms a transaction that isn’t linked with the right hash, everyone will know and the transaction will be rejected. 

The Proof-of-Work machine is frontwards-predictable but not backwards-predictable. So it’s easy to know what will come out of the machine if you have the input, but impossible to know what went into the machine if you have the output. 

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Proof of Stake

Proof-of-Stake (PoS) is a consensus mechanism that verifies transactions by having specific investors approve incoming transactions. These people are called validators. 

Validators are cryptocurrency owners who approve and reject transactions in the network. In order to do this, they begin by lending a large sum of cryptocurrency to the network as collateral. Then, a random lottery process picks lenders to act as validators. 

Validators work together to approve authentic transactions and reject fraudulent ones. A set of transactions is only approved by the network after more than 50% of the validators authenticate it. 

The collateral gives validators a lot of motivation to only approve valid transactions. If a validator is in the smaller percentage of voters at the end of the validating session, they lose a significant amount of their loan. 

However, if they are in the majority then they receive a substantial reward. This encourages validators to tell the truth instead of trying to game the system.

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Which is Better?

Proof-of-Work (PoW) and Proof-of-Stake (PoS) are hot topics for debate in the cryptocurrency world. Below is a set of pros and cons for each.

Proof-of-Work

Pros

• Relies more on computers and less on people. 
• Extremely secure. 
• More widely tested.

Cons

• Requires lots of energy.
• Very slow processing speed for transactions.
  

Proof-of-Stake

Pros

• Fast processing
• Consumes much less energy.
• Better financial rewards .

Cons

• More vulnerable to network attacks.
• Relies more on people
  

Proof-of-Work (PoW) and Proof-of-Stake (PoS) are both mechanisms that make cryptocurrency possible. Without them, the concept of digital money would be far more vulnerable to hacking and theft. Both have limitations, but have been successful at keeping cryptocurrency safe and usable.