The two significant consensus mechanisms used by cryptocurrencies are Proof of Work and Proof of Stake. The consensus mechanism is the heart of cryptocurrencies because it verifies a transaction, regulates the issuance of new units of its supply, and secures the software from attackers. Both PoW, Proof of Work, and PoS, Proof of Stake regulate the process of transactions. It verifies the users and adds them to a blockchain’s public ledger. And all that happens without being dependent on a third party.
Understanding the difference between PoW and PoS will enable you to evaluate cryptocurrencies better. The primary reason for using a consensus mechanism is to ensure that no one spends the same value twice without using a central authority, such as PayPal and Visa in the middle. The way consensus mechanism work is that it lets the computers in a crypto network evaluate legitimate transactions. Proof Work or PoW is the oldest and was first used by Bitcoin, then came in Ethereum 1.0. Soon after them, many other cryptocurrencies joined in. However, Proof of Stake, PoS came a bit later, and it powers Tezos, Cardano, Ethereum 2.0, and more.
Understanding Proof of Work
Bitcoin, built by Satoshi Nakamoto, found a safe transaction where there was no need to use a third party. And he achieved that by creating what he called the PoW system, in other words, the Proof of Work system. The way PoW works are it determines how the blockchain reaches consensus. Simply put, PoW helps in determining whether the transaction is valid or not, or whether someone is trying to forge it or do something back, for example, spending the same fund more than once. Now, PoW is based on something called cryptography; it’s an advanced form of mathematics.
The mathematical equations that PoW uses are complicated to decode, and only a few powerful computers can solve them. Once the equation gets solved, the computer learns that the transaction is legitimate. And there are no two same equations for a transaction. Since PoW turned out to be an innovation in the cryptocurrency world, many other blockchains got inspired by it and calling their consensus model Proof of Work. Proof of Work consumes a lot of energy, but it makes it stand out because it processes only a limited number of transactions given time duration.
PoW offers a lot of robust advantages, particularly for a valuable cryptocurrency like Bitcoin. It helps in securing the decentralized blockchain. Since it consumes a lot of power, groups or individuals who want to meddle with Bitcoin fail to do that, and it becomes impractical. But since it consumes such a high amount of electricity, alternatives have been developed, and the one that is often used other than PoW is PoS, which is Proof of Stake.
Understanding Proof of Stake
Proof of Stake was created in 2012 by Sunny King and Scott Nadal. When they began this, they argued that Bitcoin presents some limitations, particularly in terms of scalability. The first model built on Proof of Stake was Peercoin. When this was created, the benefits determined were a more equal and fairer mining system, less reliance on electricity, and more scalable transactions. Seeing the apparent benefits, Ethereum came into the picture and moved from PoW to PoS. If you take Ethereum, they have a plethora of DeFi transactions, NFT minting and sales, stablecoin smart contracts, and a few other projects that Ethereum is already working on.
So, what Ethereum did is they built a new ETH2 blockchain. It rolled in December 2020, and it is said that they finish in 2022. Ethereum 2.0, the upgraded version of Ethereum 1.0, will allow everyone a less resource-intensive and faster consensus system. Other cryptocurrencies, such as Tezos and Cardano, are good examples of using the PoS consensus mechanisms. Their goal is to lower their fees and enhance the transaction speed. Instead of relying on a computer to generate the correct hash, PoS’s participation is determined based on ownership of the coin supply. The protocol defines factors, and the PoS algorithm elects a node to propose the next block. After a node gets elected, what it does is it verifies the validity of the transaction inside the block. Then, it signs it and later proposes the block for validation.
To become a validator, one needs to have robust technical knowledge. In addition, a minimum amount of crypto will be required to stake, and that requirement is relatively high. The biggest challenge is that participants can lose some of their stakes if their node is validated as a bad block of transaction pr goes offline.
The Primary Difference between PoW and PoS
The significant difference between PoW and PoS is the energy consumption of both the consensus mechanism. While Proof of Work consumes a lot of electricity to validate a transaction, Proof of Stake consumes less electricity when the networks operate. Other than this, there are some economic consequences as well. When it comes to Proof of Work, the result is the heavy-duty consumption of time, energy, and power to solve the advanced mathematical equation; when it comes to Proof of Stake, if a validator accepts a bad block, their pay the penalty by losing some portion of their staked fund.
How Solana’s Proof of History Could be a Huge Advancement?
Unlike Proof of Work and Proof of Stake, Solana has a different consensus mechanism called Proof of History. As the name suggests, the way it works is pretty much the same as the name of the consensus. Utilizing PoH creates a historical record. This proves that an event has taken place at a particular moment. So, what Solana does is structures chains of messages together. The cryptographic proof is generated of the relative time and order of every message in the historical record.
The data that gets hashed into the proof signifies that it had happened before the proof was generated. Node is shared with the new block with validator nodes, where they verify those proofs. Now, Solana never sends a block. They use the term to explain the sequence of entries. The validation messages in the ledger go for validation. The validator decides whether the node should be voted up or down, where up is valid and down is invalid. Solana’s protocol will have no dependencies on the local timeouts or computer clock. The result of PoH is that the network won’t get delayed and will continue producing at a faster speed.