Proof of Work vs. Proof of Stake

Friends and colleagues have asked me to describe Proof of Stake vs. Proof of Work. I find it difficult to articulate this topic, so I sat down and started writing it out; before I knew it, I had paragraphs written out, so I thought I might share.

Proof of work (PoW) and Proof of Stake (PoS) are the two primary consensus mechanisms (a system that allows all computers on a network to agree on legitimate transactions) used to verify new transactions, add those transactions to the blockchain, and generate new tokens. Decentralized networks need to make sure the same money isn’t being spent twice without engaging a central authority (payment system).

Proof of work came first. So I will start with that. PoW and mining are similar concepts. It’s called ‘proof of work’ because the network uses a lot of processing power. These blockchains are secured by miners worldwide trying to be the first to solve the same math puzzle so that they can update the blockchain with the transaction and receive crypto. 

Advantages: it is a proven method to maintain a secure, decentralized blockchain. A growing value attracts more miners increasing that power and security. This works great for simple but valuable crypto like Bitcoin, and because of the amount of processing power, it makes it impractical to tamper with a valuable blockchain.

Disadvantages: it is very energy-intensive and potentially challenging to scale to accommodate many smart-contract transactions blockchains (like Ethereum) can produce. So surging popularity could leave the blockchain struggling to keep up, therefore causing spikes in fees. Which leads to alternatives like ‘Proof of Stake.’

Whereas blockchains like Bitcoin primarily process incoming and outgoing transactions (think checkbook), blockchains like Ethereum handle that in addition to an array of DeFi transactions, smart contracts, NFT, and loads of developer innovations. Therefore, those types of transactions are much better suited for Proof of Stake.

In Proof of Stake, staking functions similarly to Proof of Work mining — it’s the process wherein a network participant is selected to update the blockchain with the newest transaction and earn crypto.

It varies by project, but in PoS blockchains, ‘validators’ are engaged that contribute (‘stake’) their own crypto for the opportunity to validate new transactions, updating the blockchain, and collecting rewards. The network selects winners based on the amount of time their crypto is staked and how much they have in the pool. This means the most invested participants see the rewards. Once the validator posts the latest block of transactions, the other validators can attest to the block’s accuracy, and when the threshold has been reached, the network updates the blockchain. All validators involved then receive rewards distributed by the network directly proportional to each one’s stake.

Advantages: This consensus mechanism will be faster and less resource-intensive. The goal is to maximize efficiency and speed while lowering fees. 

Disadvantages: High-level technical knowledge required. Usually, the minimum necessary for validators to stake is relatively high and open to slashing (losing some stake if the validator node goes offline or validating bad blocks of transactions). 

The most significant difference between PoS and PoW: Resource consumption. Both have economic consequences for bad actors. PoW miners are cost time, energy, and computing power, whereas, PoS validators cost a portion of their funds depending on their network.