Understanding the Difference Between Proof of Work and Proof of Stake
Many have heard of proof of work and proof of stake, but don’t necessarily know the difference. Why does this matter? Because the difference is huge—it’s the difference between competing in a drag race and being elected class president.
Different blockchains use different consensus mechanisms to preserve order and keep things running smoothly. Proof of work is the original gangster of consensus, having driven the Bitcoin blockchain (and many others) since 2009. Proof of stake emerged in 2011 as an energy-friendly alternative for accomplishing the same task, and it just happens to work completely differently.
If you’re reading this guide, we’re going to assume you’re already familiar with some big-picture crypto concepts like mining and decentralized ledger technology. Proof of work and proof of stake are like two different kinds of engines that drive different blockchain systems, and by the time you finish reading this, you’ll have a clear understanding of how they compare and contrast with each other.
Miners in a proof of work system are competing against each other to solve cryptographic puzzles. These puzzles are extremely hard to solve—the more miners there are, the more difficult the math becomes—but it’s rather simple to establish when a miner has a correct answer. The rest of the network verifies that correct answer, and the miner collects a financial reward for adding a new block to the blockchain.
It’s not unlike an extremely competitive tug of war using mathematics. There is a zero-sum element to this game: only one miner gets paid, so people are incentivized to deploy supercharged number-crunching machines in order to establish a lucrative competitive advantage. Proof of work systems consume lots of electricity as a result—Bitcoin on its own uses an amount of electricity on par with some small countries. This is because miners are incentivized to use high-powered computer equipment and squeeze out every efficiency they can, even joining so-called “mining pools” to collaborate with other miners and share their rewards.
Proof of stake is more like a profitable game of hot potato. The network chooses just one node to add a new block to its blockchain, and they are heavily incentivized to do so in good faith. There can be serious negative financial repercussions if validators in proof of stake consensus get meddlesome. These people have pledged a figurative security deposit, predictably called a “stake,” which is simply an amount of cryptocurrency worth real money. The larger their stake, the more likely they are to be elected to verify new blocks, so these network participants are highly inclined to act in good faith.
If the name of the game is to reduce the energy consumption burden, then proof of stake works by shifting the attention from expensive hardware to high-security deposits.
If a bad actor was able to control more than half of a decentralized cryptocurrency network, they could potentially reverse transactions, but these “double-spend attacks” would be detected immediately. Even with a hypothetical controlling share of the network, a 51% attacker can’t change the rules of the game. Mining invalid transactions would fork the blockchain. Not only would they exclude themselves from honest participants, but the community could solve the problem immediately by switching to a new mining algorithm that rendered the attacking hardware useless. It’s probably not worth it. In any case, proof of work and proof of stake both work to guard against this from happening.
The power required to control more than half of the Bitcoin network, for example, is completely unrealistic to wield. While it is theoretically possible to amass that much computational firepower, the reward waiting on the other side of that challenge isn’t worth the expense. By the time someone controlled more than half of the network’s mining power, they’d incur so much electricity and hardware costs that the financial reward wouldn’t sufficiently offset it.
The incentives are even more clear-cut for proof of stake. While there are some mechanisms at play to prevent the largest stakeholders being selected time and time again to add new blocks on the blockchain, the simple truth is that the size of your stake plays a significant role. The size of your stake is mostly proportional to your chances of being selected to make a new block. So rather than amass 51% of the computing power on a network, you’d need to acquire 51% of a particular cryptocurrency’s market cap. This is just as prohibitively expensive, although in a different way.
Proof of work requires lots of computing power in order to be successful, while proof of stake requires a large security deposit. There are comparable pros and cons for each, but they both work to preserve the essential consensus that makes decentralized blockchain systems work. The only question is this: which game do you want to play? Would you rather use supercharged mining hardware, whether at home or via the cloud? Or would you rather part with a large stake in the network electing your node to forge new coins?
In any case, you’ve got to make a contribution to a network in order to make a profit from it. Do you want to drive a race car or run for class president?
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