If you have been watching the cryptocurrency market, you may have realized that something is happening throughout the landscape.
What is it exactly? One concept: Proof-of-Stake (PoS).
A growing number of cryptocurrencies are either adopting or transitioning to a PoS system and abandoning the old Proof-of-Work (PoW) consensus mechanism. So far, it has been a welcomed addition to the crypto ecosystem. But many still need to learn what this means for investors, holders, and creators.
Is there a considerable gap in the debate of Proof of Work vs. Proof of Stake? Let’s find out!
Proof of Work was the original consensus mechanism used to validate a cryptocurrency blockchain and add new blocks. PoW was first pioneered by Bitcoin and was then also used by Ethereum 1.0 and others.
On the other hand, Proof of Stake is also a consensus mechanism for processing cryptocurrency transactions and creating blocks in a blockchain. It validates entries into the blockchain and keeps it secure and is used by Ethereum 2.0, Cardano, Tezos, and others.
Both PoW and PoS keep the blockchain secure and help with data synchronization. Therefore, both methods are effective at maintaining a blockchain. However, the key difference is that they both rely on different approaches. With PoS, the blocks are verified using the coin owners’ machines, which means less computational work is required.
Put simply, Proof of Stake was created as an alternative to Proof of Work.
PoW mechanisms require cryptocurrency miners to solve cryptographic puzzles. PoW was called Proof of Work because it requires a massive amount of processing power as it requires computers to solve these puzzles. A long string of numbers and letters is used to stave off malicious attacks, but it requires a lot of power to verify and validate transactions.
PoS mechanisms require validators to hold and stake tokens and earn transaction fees. Validators are chosen randomly based on how many coins they have in the blockchain network, which is a process called staking. The coins function as collateral, and when a node is selected to validate a transaction, there is a reward. When enough validators agree that a transaction is accurate and when enough nodes verify the transaction, it goes through.
Indeed, PoS is less risky than PoW because its compensation mechanism is structured in a way that makes an attack on it less advantageous. In addition, validators are selected randomly to validate block information. Because of this, the fee collection process is less competitive with PoS than PoW, which uses a rewards-based mechanism.
PoW block creators are called miners, while PoS block creators are called validators.
With PoW, participants have to buy equipment and energy to become miners. With PoS, participants need to own coins or tokens to become validators. Under a PoW landscape, miners receive block rewards, while validators in PoS receive transaction fees. Both mechanisms penalize network disruptions and malicious players. In PoW, miners that submit invalid information have to bear the cost of computing power, energy, and time. Similarly, PoS validators who submit invalid or inaccurate information lose a portion of their staked funds as a penalty.
PoS is more energy efficient than PoW. PoW has always been surrounded by environmental sustainability concerns, leading to interventions and recommendations by public policymakers. But these problems are addressed with PoS, as it is designed to reduce network congestion. PoS mechanism substitutes staking for computational power, causing there to be less energy consumption since validators do not need to rely on single-purpose hardware. PoS validators do not need to spend electricity on duplicative processes like PoW miners and can operate with lower resource consumption.
Yes, it is correct that PoW has its advantages. It is a proven and robust approach to maintaining a secure decentralized blockchain. However, in a global economy that champions green energy and a shift to renewable sources, it is energy-intensive and may not be able to accommodate the large number of transactions that blockchains like Ethereum can generate. That is why PoS was developed as an alternative to overcome PoW’s scalability limitations. For example, with Bitcoin, which depends on PoW), the blockchain processes incoming and outgoing transactions. But the Ethereum blockchain processes Decentralized Finance (DeFi) transactions, stablecoin smart contracts, NFT minting and sales, and other innovations that could come in the future.
Ultimately, this is why the Ethereum 2.0 blockchain uses PoS with better speed, lower fees, less energy consumption, and more scalability.
While PoS is less energy intensive and has more incredible transaction speed and capacity, a significant disadvantage of PoS is that it tends towards centralization. PoW is more decentralized and requires more computers and participants to approve transactions.
For crypto enthusiasts, decentralized crypto tested at a scale of over $1 trillion in value. But PoS still has to prove its superiority at such a large scale and confirm that the newest decentralized system is better than a centralized one.
In some PoS systems, validators are elected only on the basis of money. This typically results in the PoS being less democratic than PoW. Another problem with PoS is that it is yet to be tested on as big a scale as PoW.
Experts can weigh the pros and cons surrounding the debate of Proof of Work vs. Proof of Stake. However, it is evident that PoS is the superior alternative because it is more apparent, less energy-intensive, and more effective. It is inevitable that PoW will go out the front door and allow PoS to become the dominant consensus mechanism.
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