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October 4, 2022

Proof of Stake vs. Proof of Work: What’s The Difference?

Proof of Stake vs. Proof of Work: What’s The Difference?

With Ethereum’s long-awaited network upgrade finally taking place, now’s a great time to dive into proof of work vs. proof of stake. The newbie crypto investor probably won’t notice the difference. However, it has a profound impact on how blockchains operate, and their viability, and it also presents opportunities for you to earn more cryptocurrency.

What is a Consensus Mechanism in Crypto?

Proof of Work (PoW) and Proof of Stake (PoS) are consensus protocols used across different blockchains. Essentially, a consensus protocol is a mechanism used to verify transactions while keeping the blockchain safe and secure.

As blockchains are decentralized, there is no one entity keeping ledgers up-to-date and accurate. Actually, there are hundreds of thousands of people, computers, or nodes across the globe involved in the process. In this incredibly dynamic environment, there has to be a method of verifying transactions, and the sources that do this need to be trustworthy.

A consensus mechanism maintains this trustworthiness while ensuring the ledger remains transparent and correct, with all participants agreeing on its state.

Anyway, let’s get down to discussing the two most common consensus mechanisms – proof of stake vs. proof of work.

What is Proof of Stake?

Proof of stake is the consensus mechanism used by Ethereum 2.0 and many other blockchains. It works by using coins associated with the blockchain. However, the blockchain can’t just use any coins in the ecosystem – that would be stealing from people’s wallets.

Holders of some cryptocurrencies are given the opportunity to stake their coins and become a validator. Staking locks in a specified amount of crypto to be used for transaction validation.

We’ll come to the benefits of staking later.

Usually, validators are chosen at random to verify a transaction. This is frequently decided by the number of coins they have available. Furthermore, multiple validators are required for a single transaction as they must agree that a transaction is accurate. Only when multiple parties come to a consensus that the transaction is genuine can it be processed.

What is Proof of Work?

Most people are, probably unknowingly, familiar with the Proof of Work consensus mechanism. PoW was built into the Bitcoin blockchain in 2009, but you probably know it better than Mining.

With PoW, the validation process is done using computing power. For every new transaction, miners across the globe race against each other to complete cryptographic puzzles, thus verifying the transaction and keeping nodes honest. A new block can only be added to the blockchain when the transaction is validated.

Through the long string of letters and numbers, also known as hashes, it’s thought that any malicious attacks can be prevented. For every transaction that is verified, one hash is created and spread across the entire network. From there, if anyone were to tamper with the hash, it would be instantly rejected.

Proof of Stake Pros & Cons

The main benefits of Proof of Stake lie in its transaction speed and environmental friendliness in comparison with PoW. Therefore, PoS blockchains are considered to be more scalable for mass market use and processing large transaction volumes.

Additionally, it provides an earning model called staking, where investors can earn more cryptocurrency.

However, major cons need to be considered. The idea of cryptocurrency is decentralized finance. It’s hard to maintain and claim a blockchain using PoS is truly decentralized. For that reason, PoS is also considered less secure than PoW.

Proof of Work Pros & Cons

PoW is recognized as a decentralized consensus algorithm. It requires a higher volume of computers to validate transactions – the more participants, the more decentralized. Therefore, those who use crypto for its decentralization would argue PoW is the way forward.

Another positive of more participants is the added security provided. As the number of validators increases, the likelihood of a hack or attack decreases.

However, with more computers comes more environmental impact and energy usage. Additionally, slower transaction speeds as it takes time for each validator to complete their work. These two major cons make PoW less appealing and challenging to scale for mass-market use.

How to Earn Crypto with PoS & PoW

Staking

With PoS, anyone who owns a stakeable cryptocurrency can lock in a specific amount to be used for the PoS consensus mechanism. In return, the staker will receive rewards in the form of more cryptocurrency. Usually, you will receive a guaranteed APY %. However, stakers are locked in for an agreed and often lengthy period of time.

Mining

To become a miner, you’ll need a mining rig – which can be costly. Therefore, barriers to entry are a little higher. However, once you’re up and running, you simply leave your rig running to do its thing. It requires little to no input from you unless maintenance is required.

For small-time miners, it’s best to join a mining pool to give you the best chance of earning a substantial amount. Remember, you’re competing with mining companies that have entire warehouses of machines dedicated to crypto mining.

In Summary – Proof of Stake vs. Proof of Work

So, now you know the difference between PoS and PoW. In their current forms, both need to adapt to enable crypto to become a mass-market system that can safely complete an exponential number of transactions rapidly.

However, they both have pros and cons. As a newbie crypto investor, it’s probably something you don’t need to think about unless you’re incredibly conscious of your impact on the environment.

To start investing in crypto, check out Escryptos digital wallets – the most secure retail crypto storage on the market.

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