In the world of decentralization, Proof of Work (PoW) and Proof of Stake (PoS) are two different consensus methods used to verify transactions and add them to a blockchain. BUT, what do they mean and how do they work? Let’s get into it. 

We’ve talked about decentralization before, but let’s take a step back and review what centralization really means as it pertains to blockchain technology and cryptocurrencies. When Bitcoin entered the chat back in 2008/2009, it introduced the futuristic concept of ‘trustless’ financial transactions that can be executed digitally without the need of a central authority (like a banking system or government) to approve transactions between parties, therefore removing the necessity of ‘trust’ in these situations. Everything would be visible on a publicly distributed ledger for everyone to see and use on a peer-to-peer basis. But, without a trusted central authority to verify transactions, what makes a system like that secure and reliable?… 

For peer-to-peer networks and transactions to work, you need consensus mechanisms to hold them in place. This is where Proof of Work and Proof of Stake come into play. These two models of reaching consensus differ greatly, so let’s break it down. 

Proof of Work Explained

Proof of Work (PoW) is the consensus method of securing a blockchain network in which miners (people who verify transactions and add them to a public ledger) are rewarded for their efforts by earning the native cryptocurrency of the blockchain they are mining. Miners use massive amounts of computational power to compete and solve complex mathematical problems that may or may not allow them to verify and add new blocks of data to the chain. Only the first computer that finds this value gets rewarded in cryptocurrency and verifies the block. Solving these problems takes a great deal of time and money and thus, creates built-in consequences for negative actors that try to manipulate and approve fraudulent transactions. However, we should mention here that there are loopholes in this system that make it more centralized, but more on that in the Key Similarities and Differences section. PoW is most notably used by Bitcoin and Ethereum, which are considered first and second generation blockchains. 

Proof of Stake Explained

On the contrary, Proof of Stake (PoS) is a less energy-intensive and much more sustainable method for validating transactions on the blockchain in which ‘staking’ replaces the ‘mining’ aspect found in traditional PoW networks. In a PoS model, only someone who owns part of the network – i.e., has a ‘stake’ in the network – can validate transactions and mint new blocks. These people or groups are known as ‘validators’. Typically, you have to prove ownership by holding the native coin for a certain period of time before you’ll be eligible to validate transactions (depending on the blockchain). PoS blockchains use the amount of cryptocurrency block validators are willing to deposit as a trust mechanism; the higher the stake, the higher the chances the validator is picked to mint the next block. Validators are then rewarded by receiving the transaction fees from the block(s) they’ve correctly minted. PoS features scalability and attempts to encourage further decentralization by making it easier for stake holders to be picked to mint new blocks at random based on a few metrics (like amount of stake). Additionally, if a stake holder doesn’t want to be a validator, a process known as ‘delegation’ allows them to join stake pools they trust to validate new blocks on their behalf. By delegating their cryptocurrency to a stake pool, they become eligible to share in part of the rewards of that pool after a certain amount of time. Some known blockchains that utilize a PoS model are Cardano and Tezos.   

Did You Know?
projectNEWM has a stake pool that supports the build of our fair, music ecosystem – click here to learn how to get involved and earn rewards!

Key Similarities and Differences

The More You Know

The main takeaways when it comes to knowing the difference between these two consensus mechanisms are that they vary by blockchain and can help you understand more about how a cryptocurrency works.