What are Proof of Work and Proof of Stake?

In this blog post, we will discuss two major consensus algorithms: Proof of Work (PoW) and Proof of Stake (PoS). Essential to the security and operation of blockchains, these algorithms define how transactions are validated and new blocks are added to the blockchain. By understanding the differences and operating principles between PoW and PoS, you can get a better understanding of how different cryptocurrencies work and what their security is based on.

              
What is blockchain?
Before familiarizing yourself with the Proof of Work and Proof of Stake consensus algorithms, it is good to review the central principles of the blockchain. In terms of cryptocurrencies, a blockchain is a decentralized and public digital database that permanently and immutably records all transactions on the network. It consists of sequentially linked blocks, each of which contains a set of transactions, a timestamp, and a reference to the previous block by means of a cryptographic hash. This structure forms a chain where each block confirms the correctness of the previous block, making data changes practically impossible without network consensus. The decentralized nature of the blockchain means that copies of it are stored on thousands of different computers around the world, increasing its security and reliability.
Basically, the operation of the blockchain is monitored by a distributed network, which consists of servers, i.e. nodes, which perform various tasks, such as validating transactions. To perform these tasks and ensure the integrity of the blockchain, a consensus algorithm is needed, which determines how the nodes of the network reach an agreement on the state of the blockchain. The two most commonly used consensus algorithms are Proof of Work (PoW) and Proof of Stake (PoS). PoW is based on computationally demanding tasks where network participants compete to solve mathematical problems. PoS, on the other hand, distributes the responsibility of maintaining the blockchain to participants based on the amount of cryptocurrencies they own.
The basic principles of blockchain make it a reliable and transparent technology that will likely affect our daily lives in many different ways in the future. Next, we'll take a closer look at PoW and PoS algorithms and their impact on blockchain maintenance and security.
What is Proof of Work?
Proof of Work (PoW) is a consensus algorithm used by many, especially older cryptocurrencies, to ensure the security and integrity of the blockchain. PoW is based on network administrators, or miners, competing with each other to solve complex mathematical problems. Solving these problems requires considerable computing power and energy, which makes the process expensive and resource-intensive. When Louhija manages to solve the aforementioned problem, he gets the right to add a new block to the blockchain and gets a reward in cryptocurrency.
Although PoW is known for the strong security and reliability it offers, its huge energy consumption has also attracted considerable criticism and concern over the years. This has led to the fact that especially the developers and communities of newer cryptocurrencies have started to prefer more energy-efficient consensus algorithms such as PoS. PoW has been particularly successful in the case of Bitcoin, making it a central and iconic algorithm in the world of cryptocurrencies. Thus, while PoWs face several challenges, its position as one of the most central consensus algorithms in cryptocurrencies remains unchanged.
Next, we'll look at the Proof of Stake algorithm, which provides an alternative way to reach consensus on the blockchain network.
What is Proof of Stake?
Proof of Stake (PoS) is a consensus algorithm used in many blockchains as an alternative to PoWs. The most well-known PoS-based cryptocurrency is definitely the largest platform solution in the cryptocurrency world, Ethereum. With the PoS algorithm, network participants, called validators, are selected to create blocks and confirm transactions based on the amount of cryptocurrency they own. This means that the more cryptocurrency the validator locks (stake) into the work of maintaining the blockchain, the higher the probability he has of being chosen as the creator of a new block.
In the PoS algorithm, validators do not compete with each other to solve mathematical problems, but are chosen randomly or by a combination of randomness and the amount of staked currency. When a validator is selected, he creates a new block and adds it to the blockchain.
One significant advantage of the PoS algorithm is its energy efficiency compared to PoW, as it does not require huge computing power and energy consumption. This makes the PoS algorithm a more environmentally friendly and scalable option for maintaining blockchain networks. The security of PoS is based on the fact that validators lose part of their staked cryptocurrency if they attempt fraudulent activity. This naturally encourages them to act honestly.
The popularity of the PoS algorithm has grown especially due to its scalability and environmental friendliness, but there are also significant challenges associated with its use. One of the biggest concerns is the potential concentration of power, as large investors with significant amounts of cryptocurrency can dominate the network and influence blockchain decision-making. This can lead to centralized structures that undermine blockchain's original idea of ​​a decentralized and democratic system. Also, although the PoS algorithm is energy efficient, it requires careful planning and rules to ensure the security and fairness of the network. In the future, PoS may continue to evolve, and these challenges will be addressed with various technical and financial innovations that may make it an even more attractive alternative to cryptocurrency ecosystems.
The main differences between Proof of Work and Proof of Stake
Proof of Work (PoW) and Proof of Stake (PoS) are the most popular consensus algorithms in cryptocurrencies. They operate on different principles to ensure the security and integrity of blockchains. Although both algorithms aim for the same result, their operating methods and effects differ significantly from each other. The differences between these algorithms significantly affect how energy is used, how validators are chosen, and how security and decentralization are implemented. In addition, they determine how participants are rewarded. The main differences between these consensus algorithms have been reviewed below:
Energy consumption:
PoW: Requires a huge amount of computing power and energy.
PoS: Is significantly more energy efficient because validators are selected based on the total amount of cryptocurrencies staked.
Selecting validators:
PoW: Miners compete with each other for computing power to solve mathematical problems. The first one to solve the problem gets to add a new block.
PoS: Validators are selected randomly or based on the amount of cryptocurrency they stake. The more cryptocurrency the validator locks into the stake, the higher the probability of being selected.
Security:
PoW: Security is based on the fact that an attacker would have to control more than 50 percent of the network's computing power in order to manipulate the blockchain. In principle, this is very expensive and extremely difficult.
PoS: Security is based on validators losing their staked cryptocurrencies if they attempt fraudulent activity, which incentivizes them to act honestly.
Compensation:
PoW: Miners are rewarded in new cryptocurrencies and transaction fees.
PoS: Validators are rewarded in transaction fees and possibly new cryptocurrencies.
Decentralization and Centralization:
PoW: The blockchain can become centralized instead of decentralized if large concentrations of miners or a group of miners (mining pools) control most of the network's computing power.
PoS: Power can be concentrated in validators holding large amounts of that currency, which can lead to the concentration of the blockchain.
The differences presented above significantly affect how different cryptocurrencies and blockchains work and how their security, efficiency and decentralization are implemented. PoW and PoS also differ in how they affect the development and deployment of blockchain networks. PoW has traditionally been the most popular consensus algorithm, especially with the success of Bitcoin, but its energy consumption has led many projects to switch to the PoS algorithm or its variations. PoS has the potential to speed up blockchain consensus and improve scalability, but it also raises questions about balancing security and decentralization. The choice between PoW and PoS ultimately depends on the specific needs and goals of each blockchain.
Summary
Proof of Work (PoW) and Proof of Stake (PoS) are two major consensus algorithms that determine how the security and operation of blockchains are ensured. Understanding the principles of these algorithms helps to understand how different cryptocurrencies work and what their security is based on. PoW requires considerable computing power and energy, while PoS is more energy efficient and is based on the cryptocurrency staked by validators. PoW and PoS also differ significantly in how validators are chosen and rewarded, as well as how they prevent manipulation of the blockchain. In summary, PoW and PoS offer different solutions for maintaining blockchains. They both have their strengths and weaknesses, so ranking them is challenging.

Mikko Soon
Head of Northcrypto Private