As you’re exploring the blockchain technology and the world of cryptocurrencies, you might also have a huge chance to bump into these two terms: proof of work and proof of stake.
Both of these models are called “consensus mechanisms” and they are a current requirement to confirm transactions that take place on a blockchain without the need for a third party.
This article aims to explain the basics of each model as well as to give real-world examples of which popular blockchains have adopted them.
PROOF OF WORK
Proof of Work is a protocol that has the main goal of deterring cyber-attacks such as a distributed denial-of-service attack (DDoS) which has the purpose of exhausting the resources of a computer system by sending multiple fake requests.
The Proof of work concept existed even before Bitcoin but Satoshi Nakamoto applied this technique to his/her — we still don’t know who Nakamoto really is — digital currency revolutionizing the way traditional transactions are set.
In fact, PoW idea was originally published by Cynthia Dwork and Moni Naor back in 1993, but the term “proof of work” was coined by Markus Jakobsson and Ari Juels in a document published in 1999.
But, returning to date, Proof of work is maybe the biggest idea behind the Nakamoto’s Bitcoin white paper — published back in 2008 — because it allows trustless and distributed consensus.
A trustless and distributed consensus system means that if you want to send and/or receive money from someone you don’t need to trust in third-party services. With Bitcoin and a few other digital currencies, everyone has a copy of the ledger (blockchain) therefore no one has to trust in third parties because anyone can directly verify the information written.
PROOF OF WORK AND MINING
Proof of work is a requirement to define an expensive computer calculation, also called mining, that needs to be performed in order to create a new group of trustless transactions (the so-called block) on a distributed ledger called the blockchain. Mining serves as two purposes: 1) To verify the legitimacy of a transaction or avoiding the so-called double spending and 2) To create new digital currencies by rewarding miners for performing the previous task.
PoW is not only used by the Bitcoin blockchain but also by Ethereum and many other blockchains. However, Ethereum developers are now planning to do a hard fork to make a transition from PoW to Proof of Stake.
In a distributed consensus-based on the proof of Work, miners need a lot of energy. And these energy costs are paid with fiat currencies, leading to constant downward pressure on the digital currency value.
PROOF OF STAKE
Proof of Stake was first created in 2012 by two developers called Scott Nadal and Sunny King. At the time of its launch, the founders argued that Bitcoin and its Proof of Work model required the equivalent of $150,000 in daily electricity costs.
PoS will make the consensus mechanism completely virtual. While the overall process remains the same as proof of work (POW), the method of reaching the end goal is entirely different. In POW, the miners solve cryptographically hard puzzles by using their computational resources.
In POS, instead of miners, there are validators. The validators lock up some of their Ether as a stake in the ecosystem. Following that, the validators bet on the blocks that they feel will be added next to the chain. When the block gets added, the validators get a block reward in proportion to their stake.
Thanks to a PoS system, validators do not have to use their computing power because the only factors that influence their chances are the total number of their own coins and the current complexity of the network.
The most important theory supporting the Proof of Stake consensus mechanism is that those who stake are going to want to help keep the network secure by doing things correctly. If a forger attempted to hack the network or process malicious transactions, then they would lose their entire stake.
POPULAR CRYPTOS THAT USE PROOF OF STAKE MECHANISM
The first-ever blockchain project to use the Proof of Stake model was Peercoin. The initial benefits include a fairer and more equal mining system, more scalable transactions, and less reliance on electricity.
The other one is Dash, which allows users to send and receive funds in just a couple of seconds.
Another well-known blockchain that uses the Proof of Stake model is NEO. The Chinese smart contract protocol has had an amazing journey since it was first launched in 2016, increasing the value of its coin by more than 100,000%!