Proof-of-work and proof-of-stake are ways to mine cryptocurrency coins, and are both “consensus mechanisms”. They are required to record transactions on blockchains without requiring a third party.
Proof-of-work
Proof of work is a protocol needed to execute a complicated mathematical equation, called mining. This is a process required to create a new group of transactions that will be added to the blockchain.
The concept behind proof-of-work:
- Transactions are all gathered in the form of blocks.
- Miners confirm these transactions as valid.
- Then they solve a mathematical equation.
- The first miner that solves the equation gets a reward.
- The valid transactions get stored in the blockchain.
Problems of proof-of-work protocol:
- The computers required for mining must have a lot of processing power and are very expensive.
- Mining needs big amounts of electricity.
- Some mining pools have more chances than other individuals to mine. For example, 70% of hashing power is coming from China due to its cheap electricity. This could decrease the level of decentralization.
Proof-of-stake
This protocol turns miners into validators and makes the whole process of mining virtual. Unlike the proof-of-work protocol that rewards miners, the block creator is picked through several combinations of a random selection of wealth and age. Since the mining process is virtual, there is a great amount of energy and money saved.
The concept behind proof-of-stake
- Validators are in charge to elect the next block creator.
- They invest some of their tokens, and can’t use them until the validation is complete.
- They validate a new block, and it gets added to the blockchain.
CONS
- Most of the stakes are owned by a limited number of people.
- The more coins you can buy, the more coins you can stake or earn. This is said to help rich people get even richer.
- Allows validators to verify transactions on multiple chains, making it possible for a hacker to transfer funds to someone else and spend this fund again before the transaction is valid.
As blockchain technology evolves, so do consensus algorithms. There is plenty of work ahead, but cryptocurrency enthusiasts continually try to update the technology and make it more secure.
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