Proof of Stake, Proof of Work, consensus mechanisms, even the basic notion of ‘validating transactions on the blockchain’… It’s easy to get lost in the tech terminology that surrounds and encompasses all things blockchain.
That’s where this series – Blockchain Explained – comes in. We’ll talk you through the definitions of terms as well as their differences. No crypto vocabulary or degree in economics required.
(And be sure to check out our A to Z guide of blockchain and crypto terms here.)
What are Proof of Work and Proof of Stake?
Proof of Work (PoW) and Proof of Stake (PoS) are the two consensus mechanisms used to check the validity of a transaction on the Blockchain. That is that they are two ways a seller and a buyer to agree that a transaction has happened. Without them any kind of trading or movement of money of goods is impossible. In real life things are simpler. You hold a dollar in your hand and you buy a hotdog with that dollar. You hand over the dollar and you’re left holding a hotdog. Simple. In the blockchain world we need a virtual, digital way of doing the exact same thing.
Think of it this way: if you want to buy something from an online store using fiat money (that’s ‘real’ money, so dollars, pounds, euros, etc) there’s always a central authority (a bank, PayPal, etc) overseeing your transaction. The money is in your account and they’re there to see it safely reach its destination and effectively stop you from spending that same money in two digital places at once, or spending the money to acquire something without it actually leaving your account.
It’s a concept so basic it’s probably not crossed your mind that something like this would even be possible. But in the digital realm it would be easy to double, triple, quadruple a ‘virtual’ figure stored on a computer somewhere allowing someone to have infinite money… If the banks didn’t keep strict tabs on it all to prevent such madness.
As cryptocurrencies are decentralized, they use the method of consensus to replace that essential central authority, keeping everything balanced and in check. Everyone else on the blockchain needs to agree that a transaction is legitimate in order for it to take place and this is either done through either Proof of Work or Proof of Stake.
What does Proof of Work mean?
As the name suggests, Proof of Work requires effort. AKA Mining. Mining is the process by which participants on the blockchain add their computer to the network and have it carry out the computation necessary to power the blockchain and keep those transactions ticking along and in check.
Basically, a computer on the blockchain is attempting to solve an extremely difficult mathematical problem. The computer needs to provide a semi-random string of numbers that meets certain conditions: the target hash. The miner who first guesses the solution correctly, gets to add a new block to the blockchain containing the latest transaction data. This miner will then receive a reward in the form of cryptocurrency.
It’s a payment for helping to keep the blockchain running. Without willing participants all around the world, the blockchain and the millions of transactions carried out upon it would grind to a halt. That crypto reward is your incentive to allow your computer (and your electricity bill) to take part in keeping things ticking along.
As for the validity of the target hash, remember that every block on a blockchain contains information about the previous transactions. This means that it’s impossible to change anything without messing up the chain. Since this chain – basically a massive ledger – is public, other miners can verify the solution once it’s broadcasted by the winning miner.
Proof of Work was initially invented as a way to prevent spam with data showing the completion of a complex problem being part of each email sent. If the sender had taken the time/power to do this maths before the message could be sent then it would be unlikely to be spam. The creator(s) of Bitcoin realized that the system could be used as a verification method and became the most well-known consensus mechanism in crypto. At the moment of writing, PoW is used by major cryptocurrencies Bitcoin and Ethereum, with the latter planning a transition to Proof of Stake. Speaking of which…
What is Proof of Stake?
Unlike Proof of Work, Proof of Stake doesn’t require work from a large number of computers. Instead of mining competitively, people can choose to stake a certain amount of money for the chance to verify a transaction. In other words, every participant places some of their crypto in a pool, and if they’re chosen to verify the transaction, they will do the job and get a reward.
Although the Proof of Stake winners are randomly chosen, the more money you stake (i.e. offer up and risk losing) the better your chances. Of course, this creates a problem: what if one person offers 51% of the total staked and thereby would win every time? Unlikely. That would require an awful lot of money to be staked so you’d basically be spending more to get the job than you were being paid to do it.
What’s the difference between Proof of Work and Proof of Stake
Proof of Work requires Miners who need hardware to verify blocks, while Proof of Stake’s Validators only need an amount of crypto to stake to do the same job. For the average person, Proof of Stake is therefore more accessible. Rather than being a race to solve a transaction, requiring ever faster and more powerful computers to win the race, Proof of Stake only requires that you stake the required amount of currency to be considered for the job.
With Proof of Stake there is one winner who completes the transaction verification. It doesn’t need all those competing computers, and therefore doesn’t consume as much energy. Proof of Stake is therefore is a big part of the drive to clean up crypto’s environmental credentials and is currently used by currencies such as Cardano and Solana while giants such as Ethereum are working to move to Proof of Stake too.