Understanding the Difference
Between Proof of Work and Proof of Stake

Since blockchain is decentralized, consensus protocols must be developed to ensure that all nodes of the computers that create the network are synchronized and properly maintaining the immutable record. Such a consensus mechanism differs with the blockchain underlying the cryptocurrency. The two most common are Proof-of-Work (PoW) and Proof-of-Stake PoS). While Bitcoin and Litecoin use the Proof-of-Work consensus protocol, Ethereum has transitioned to Proof-of-Stake.

Let us look at the difference between the two protocols.

How the protocols work

Most cryptocurrencies, like Bitcoin, run on a Proof-of-Work blockchain. Cryptocurrency mining is the process used on PoW blockchains to add a block to the blockchain ledger. Miners compete to solve a complex mathematical problem, and the winner builds the new block and adds it to the blockchain. In return, the winner gets the transaction fee and block reward for that block. The process is done through a computer program and the probability of winning the competition is proportional to computational power the miner commits to the mining process.

With Proof-of-Stake, staking is the consensus protocol that verifies transactions. Validators either stake or attest in order to receive rewards, as discussed below. The decision of who creates the next block depends upon random selection of users that have staked their own cryptocurrency and the protocol acts at specific intervals to create a block. In other words, a person that is using their own cryptocurrency can lock or stake their own coins, personally committing capital. Thus, the activity has the essence of a lottery in which the number of tickets each participant may receive depends on how much cryptocurrency he or she has staked and the length of time that he or she has staked.

Proof-of-Stake has been praised as a more equitable approach than mining, given that block confirmation rights are not simply assigned to miners with greater computational power than others. It also saves significant amounts of energy. Some argue that because it relies upon less energy and does not rely upon the ability to solve complex mathematical problems, it is more likely that it will have adoption due to the lower barrier for entry.

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