Proof of Work vs. Proof of Stake Explained | Part 6

To determine whether a transaction is valid or not to add to a blockchain’s ledger, most cryptocurrencies either use Proof of Work or Proof of Stake, which are both consensus mechanisms.

To illustrate the concept of consensus, let’s take a simple example.

Let’s say you have 10 friends who can’t decide whether to eat fast food or eat at a restaurant. For consensus to be reached, there can be agreed upon requirements to make final decisions like majority rule where 6 out of 10 votes determines the decision. Or there can be a requirement where there has to be at least 8 people who vote the same way. 

With cryptocurrencies, it’s computers coming to consensus, or an agreement, about whether a transaction is valid or not. The more computers that are connected to a network, the more secure it is, especially if computers are distributed around the world. 

 Proof of Work (PoW)

In 2008, the anonymous creator of Bitcoin who goes by the name Satoshi Nakomoto, used the concept of proof of work to ensure the security of a distributed digital payments network. 

With proof of work, miners have to solve a cryptographic puzzle to slow down the creation of blocks. It takes about 10 minutes to create a new block. To effectively tamper with a blockchain, you would need to tamper with all of the blocks in the chain, redo the proof of work for each block, and take control of more than 50% of the peer to peer network. Only then will the tampered block become accepted by everyone, which is almost impossible to do. If there’s a faulty transaction, the blockchain temporarily forks and all the other computers continue building on the longest chain.

People are incentivized financially to validate transactions properly. The miner who is able to solve the cryptographic puzzle first earns fees from the transactions in each block and a block reward, like earning Bitcoin. Every time the puzzle is solved, a new puzzle is generated for someone else to solve and validate a new block of transactions. 

Because it takes a lot of computational power and energy to mine, some people may join together to create mining farms and share the block reward. Some examples of coins that use Proof of Work include Bitcoin, Zcash, and Monero. 

Proof of Stake (PoS)

Proof of Work requires a lot of energy and computing power to process transactions and solve the cryptographic puzzle. This is why more blockchains are using Proof of Stake where validators add a stake into the network (like a security deposit) and check if all of the transactions are valid. If everything checks out, the block is added to the chain. As a reward, the validator receives the fees associated with each transaction. This process also uses far less computational power and energy. 

The more cryptocurrency a validator stakes, the more likely they will be chosen to process transactions and create the next block. If you think about a group of friends who put money in a box, the one who put the most money has the highest chance of getting a vote. Proof of Stake uses an election process which chooses a random computer to validate the next block.

How do you trust validators?

Proof of Stake employs slashing, which means if a computer tries to break the rules and approve fraudulent transactions, some of the coins they staked will be destroyed. 

They will lose more money than they gain if they try to tamper with the block.  

Some examples of coins that use Proof of Stake include Cardano, Solana, and Algorand. 

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