Proof-of-Stake vs. Proof-of-Work Consensus – What’s the Difference Between The Two Mechanisms?
If you’re familiar with the cryptocurrency world, you’ve likely come across the ‘Proof-of-Stake’ (PoS) term. Many coins created in the last few years are running on this particular technology, such as EOS and Cardano’s ADA.
So what is this PoS consensus, and what does it do?
Simply put, all blockchains need a way to reach consensus on the ledger’s state for those who participate on the network. If each user has a different idea regarding the state of the blockchain’s transactions and balances, the network is useless. So, to achieve consensus between various network participants, different ledgers use different kinds of consensus mechanisms. For instance, Bitcoin, the first public blockchain, introduced the Proof-of-Work (PoW) system that is still popular.
Proof-of-Stake vs. Proof-of-Work
In the PoW mechanism, miners are competing for the chance of adding the next block to the ledger by programming computer hardware to solve resource-intensive computations. The ‘miner’ who reaches the correct answer first gets to add the following block to the blockchain and receives a block reward as a payment. Then, Bitcoin nodes spread the information via the network, ultimately reaching consensus and allowing the ledger to move forward.
Although the PoW consensus has proven its worth as a manner to maintain a crypto coin secure, it also has some significant downsides: it is prolonged and incredibly energy-consuming. These are only some of the reasons behind people’s desire to look for alternative methods of achieving consensus in a blockchain, with one of the most used alternatives being PoS.
There are numerous variations on the central PoS mechanism, and different PoS-based crypto coins vary in the ways that system is achieved. The Proof-of-Stake consensus was first introduced to the cryptocurrency sector by Peercoin (PPC) in 2012. This relatively new system is also creating competition between participants, but this process doesn’t involve resource-intensive mining but depends on users staking their assets.
Staking basically means placing your assets as collateral. However, if you’re trying to carry out invalid transactions when your turn to validate the next block comes, you will lose a part of your stake.
Users who stake a large number of crypto coins are disincentivized from performing invalid transactions since that would probably reduce the asset’s price in question and decrease the value of their holdings. The staking process has – virtually – no real-world costs, and PoS-based cryptocurrencies usually have no block rewards. Instead, stakers are rewarded with the transaction fees that are required when using the network.
When it comes to PoS-based crypto assets, validators are typically selected randomly from all the users staking their coins – still, users with a larger stake have a better chance of being chosen. This can sometimes lead to issues of the ‘rich getting richer and dominating the system’s process’ kind.
Because of the numerous game theory considerations that have been examined when creating the PoS protocol, the systems can be incredibly complex, which means new ways for attack vectors are created.
Benefits and Downsides of PoS
PoS-based cryptocurrencies are usually running faster than PoW-based coins and can manage more transactions per second. Moreover, their environmental impact is much smaller.
Still, PoS-based crypto coins are still relatively unproven. This is emphasized because none of the largest cryptocurrencies – Bitcoin (BTC) and XRP (Ripple) – are using the consensus. As existing PoS-based crypto coins gain prominence and value, their security models will be under more pressure. In the end, only time will tell whether the PoS consensus will eventually become the standard for cryptocurrencies in the future.
Here are some of the most popular cryptocurrencies that use the Proof-of-Stake consensus:
- EOS (EOS)
- Tezos (XTZ)
- Cardano (ADA)
- Cosmos (ATOM)
- Lisk (LSK)
These are some of the most known cryptocurrencies now that use different versions of the PoS consensus. As we mentioned above, the way the mechanism is reached can differ significantly between different crypto assets.