Proof of Work (PoW) and Proof of Stake (PoS) are both ways to validate transactions and add new blocks on a blockchain. PoW consensus uses more computational power but allows anyone to be able to participate in validating blocks as long as they have a powerful enough computer. In contrast, PoS consensus uses significantly less computational power but requires the owner to lock up a large amount of the blockchain’s native coin in order to participate in validating blocks – this helps to keep validators from producing ‘bad’ blocks.
Proof of Work
Proof of Work (PoW) is when a blockchain uses computational power to validate transactions using complex cryptographic puzzles. A node that is validating transactions and creating new blocks on the blockchain is called a ‘miner’.
When a miner generates a new block in the blockchain, it undergoes scrutiny by other miners to confirm its validity and detect any potential vulnerabilities. Upon successful validation, the block is integrated into the blockchain, and the miner is compensated. This reward comprises newly minted coins – known as the block reward – and transaction fees from the transactions contained within the block.
The miner who generates the next valid block first is awarded the block rewards. As the number of miners on the network increases, so does the complexity and competition in creating new blocks. While anyone can initiate mining by setting up a node, the process typically demands specialized computers to enhance the probability of generating new blocks.
Bitcoin, the most famous PoW blockchain, relies on specialized computers, known as Application-Specific Integrated Circuits (ASICs), to perform hashing operations for mining blocks. While these ASICs are power-intensive, they are the most efficient tools for mining on the Bitcoin network. However, this efficiency comes at a cost, as it leads to substantial power consumption, raising concerns about the environmental impact of operating the blockchain.
Another issue with PoW is that it is prone to 51% attacks, where one user or entity controls over half of all miner nodes, enabling them to validate ‘bad’ transactions. This majority can convince the system that their invalid block of transactions is valid, despite objections from the remaining 49% of the network, forcing the block onto the blockchain. This allows them to double spend and rewrite past transactions.
This type of an attack is extremely unlikely to happen on Bitcoin because of the vast amount of miners there are on the network, but can be possible on smaller networks. In 2020, Ethereum Classic suffered this type of attack where a malicious actor was able to reorganize over 7,000 blocks which is about 2 days of mining.
PoW is still favored by many blockchains because the setup required to start validating blocks is minimal. PoW can technically be more secure than PoS since it can be less centralized. On a PoS blockchain a lot of validators are run by a centralized entity that will pool users’ coins together so they have enough to run a validator node. This can lead to that entity controlling a majority of the validators on the blockchain, leading it to be less secure.
To become a miner on a PoW blockchain, you just need a computer that can run a node, then set it up as a mining node. This allows virtually anyone that has a functioning computer to help secure the blockchain network (as opposed to PoS, which can require the initial commitment of a substantial crypto sum). Although you may not be able to mine blocks unless you have a specialized setup for the specific blockchain, you can still help secure the network by just providing some hash power to the network and validate the new proposed blocks.
There are still a lot of cryptocurrencies that are PoW. Of course the biggest cryptocurrency, Bitcoin (BTC), is still PoW as well as Ethereum Classic (ETC), Kaspa (KAS), Dogecoin (DOGE), Litecoin (LTC), Bitcoin Cash (BCH), and Monero (MXR) just to name a few.
Proof of Stake
Proof of Stake (PoS) is when a blockchain requires nodes to ‘lock up’ or ‘stake’ a certain amount of coins in order to participate in validating transactions. These nodes are called validators. Unlike PoW, validators do not earn newly produced coins from creating blocks. Instead they earn the transaction fees and ‘tips’ from the transactions they added to the new block.
Еach validator will still earn rewards for each new block that is created proportional to the amount of their stake. This is called a consensus reward or base reward, and is usually paid out by the blockchain itself as a reward for securing the network. The more you stake and the more validators you run, the more you will earn.
The most famous example of a PoS blockchain is the Ethereum network. Validators are required to stake their coins (32 ETH) to prevent malicious actors from starting new validators just to produce bad blocks. On the Ethereum network, if a validator starts misbehaving they will be penalized by losing a portion of their stake, usually around 1 ETH, and will have their status set to ‘slashed_exiting’.
The validator will then be removed from the active validation set and placed in the exit queue. While in the slashed exit queue, the validator will not earn rewards but incur a penalty of about 8,000 Gwei (0.000008 ETH) for every epoch, about every 6 ½ minutes, it did not perform its duty. This leads to an additional penalty of about 0.07 ETH.
PoS blockchains can still be vulnerable to 51% attacks, though it is almost impossible since it would require a lot of computers to run a node and stake the required amount of coins. The more validators there are on a blockchain the less likely it is to have this type of attack. Although it is theoretically possible: if there was a rich and dedicated group or entity, they could own 51% of the staked coins and start producing invalid blocks.
This is the risk with low market cap PoS coins as a user that holds the majority of the coins could cause this type of attack. Thankfully, there has not been any PoS 51% attacks to date but still having this possibility has many blockchains looking for alternatives to PoS and PoW.
PoS is favored by many new blockchains even though it usually has a more expensive start up cost. If a person wants to start a validator node, they usually have to stake a significant amount of the coins. For the case of Ethereum, it is 32 ETH, or about $80,000 at the time of writing. They will also need to have a computer that can run the node 24/7.
The good thing about PoS is that the computer doesn’t need to be as powerful as a PoW setup. This is because the node doesn’t have to solve complex cryptography problems. However, the computer will still require a large amount of storage since it will need to store the entire blockchain state. Also, when unstaking your coins you will usually have to wait a certain amount of time before you can withdraw your coins from the validator, although some cryptocurrencies don’t require this such as the Tezos blockchain.
Many cryptocurrencies on the market are PoS. The biggest PoS network Ethereum, actually started out as a PoW blockchain, and transitioned to PoS in 2022, cutting its energy consumption by 99%. Other PoS coins include Polygon (MATIC), Tezos (XTZ), Cosmos (ATOM), and even Polkadot (DOT), which technically uses a Nominated Proof of Stake (NPoS) system.
The NPoS mechanism is the same as a normal PoS mechanism except that it adds nominators to help improve network security. This allows users to stake their coins to nominators, who can then delegate their coins to validators without having to stake the large amount of coins. In fact, while PoW and PoS are dominant consensus mechanisms, some cryptocurrencies take a different approach and create unique mechanisms.
Other Consensus Mechanisms
Proof of Activity (PoA) is a unique mechanism that combines the PoW and PoS mechanisms so users can both mine and stake their coins to validate blocks. Unlike PoW and PoS, the blocks do not contain any transactions but are just an empty template that contains the transaction title and block reward address. The information in the transaction title is used to randomly select a validator node to sign the block and add it to the blockchain. Then the network security fee is split among the miners and validators involved in processing and signing the block. This helps lower the chances of a 51% attack because it is virtually impossible to predict which validator will be chosen to sign the next block. This type of mechanism still uses a large amount of energy due to the PoW stage and users holding a large amount of the coins will have higher chances of signing transactions and earning rewards. Proof of Activity is the mechanism that the Decred blockchain uses.
Proof of History (PoH) is used by the Solana blockchain, which operates with a built-in historical record that proves the specific moment in time at which every on-chain event occurred. Each validator maintains its own internal clock by encoding the passage of time with a simple hashing algorithm and sequential-hashing function. Each time a validator communicates, a cryptographic proof of the relative order and time of each message is recorded onto the blockchain, allowing the network to ignore local clocks and accommodate all potential network delays on their own time. This allows for efficient delivery and reassembly of transaction data without needing to wait for sequential block confirmations across the network. With this mechanism, Solana has fast transaction times without compromising security and still maintaining a degree of decentralization.
There are plenty more consensus mechanisms such as VeChain and TomoChain’s Proof of Authority (PoA), SlimCoin’s Proof of Burn (PoB), Filecoin’s Proof of Storage (PoS) and ICON network’s Proof of Contribution (PoC). However, they all aim to make the blockchain immutable and scalable, while preventing double spending and 51% attacks in their different ways.
Thank you for checking out our Proof of Stake vs Proof of Work article!
If you’d like to learn more about staking ETH, see our article Staking: The Easiest Way to Earn Crypto Rewards, and try staking ETH with MEW Portfolio using your preferred Ethereum wallet.
Don't forget to download Enkrypt for a seamless web3 multichain wallet experience. We would love to hear from you on our social media about any guide or article suggestions you have for the future. Also, if you enjoy using mobile cryptocurrency wallets, give our MEW Mobile wallet a try, it's available on both iOS and Android platforms!
