Crypto assets built on blockchain networks are decentralised currencies. Hence, without an intermediary institution like a bank, they still require certain mechanisms to ensure a smooth-running ecosystem. Here is where the consensus mechanisms come into play. These resolve several functions like a secure collaboration of networks, ensuring no party sends the same amount of money multiple times and preventing networks from the hurdle of a hard fork.
Mainly, mechanisms in place for DEFI protocols are of two kinds, Proof of Work and Proof of Stake. Let’s take a detailed look at both these consensus mechanisms and the differences between the two.
What is Proof of Work?
Proof of Work is a relatively older consensus mechanism that has been in use since the 90s and was popularised in the crypto industry in the early 2000s.
In a Proof of Work system when new transactions occur on a particular blockchain, the devices on the same network must approve the transaction and only then the new blocks will be added to the blockchain. Proof of Work is closely associated with and requires the users to perform mining.
Mining is the act of solving math-based cryptographical puzzles, and once solved the transaction is approved and verified. The incentive that lies for these “miners” is that the one who manages to solve the puzzle or equation in the shortest time receives newly minted crypto coins.
Read more about mining her: What is Bitcoin Mining? Everything you need to know
What are the Benefits of Proof of Work?
The Proof of Work System comes with an array of benefits. To list a few,
- It helps in maintaining the security and decentralized nature of the blockchain
- With the growing value of a particular cryptocurrency, more miners are pushed to become a part of the network which increases the security even more.
- Greater the processing power of a blockchain, the more difficult it is to be hacked or penetrated.
- A Proof of Work mechanism prevents constant forking risks and incentivises miners to always take a decision that is for the better of the blockchain.
What are the Disadvantages of Proof of Work?
The Proof of Work mechanism might seem great but it also has several disadvantages. Some of these cons are
- The system requires a lot of energy to sustain and thrive which impacts the environment negatively
- Scaling to massive transactions becomes an issue in a Proof of Work setting which results in slower transaction fees
- Tends to increase the transactions fees
What is Proof of Stake?
As and when the limitations of Proof of Work began to see the light of day, adjustments were made to the mechanism to give birth to a new consensus system called Proof of Stake.
In Proof of Stake, a particular network participant is designated to add the transaction blocks to the blockchain and in the process earn some crypto tokens.
The selection of this member, also called a validator, is done keeping in mind the amount of crypto they have staked. A certain number of validators must approve a transaction before it is added to the blockchain.
What are the Benefits of Proof of Stake?
Proof of Stake is a newer and updated consensus mechanism that has a lot of benefits. Some of these pros of the system are
- Proof of Stake is a lot more energy efficient and hence is better for the environment and the carbon footprint
- It doesn’t require any high class extremely advanced technology to ensure that transactions are added accurately in Proof of Stake
- One of the major advantages is that in this mechanism, more nodes are created in the blockchain which leads to the enhancement of the security even more.
- It has massively improved scalability and made fast speed transitions possible.
What are the Disadvantages of Proof of Stake
Proof of Stake might be an upgrade from the Proof of Work mechanism but it is not what its cons. For example
- Proof of Stake gives the major control to the token holders who then have the major dominance
- It becomes a problem to truly decentralize the network
- Forking risks are imminent
What are the major differences between Proof of Work and Proof of Stake?
As mentioned earlier, one of the most stand out points of difference between Proof of Work and Proof of Stake is the aspect of energy consumption. Proof of work tends to take a major toll on the environment due to its high energy consumption rate whereas Proof of Stake is a lot more nature friendly.
Any Malicious activity on a Proof of Work system is penalized through the cost of computing power and time. On the other hand, since in Proof of Stake, the staked crypto tokens are a deciding factor, they serve as a guarantee to ensure the validators don’t engage in any activity that could potentially impact the blockchain negatively since that would lead to them losing some of their stake funds.
The system also differs slightly regarding rewards. Proof of work miners gain block rewards whereas validators on Proof of Stake get rewards in the form of network fees.
POS vs POW Blockchains? Which Cryptocurrencies use Proof of Work and Proof of Stake?
Bitcoin is the biggest name in the platforms that harness the Proof of Work mechanism. Bitcoin Cash, Dogecoin, Monero, and Litecoin are more such blockchains that use Proof of Work. Proof of Stake on the other hand has gained popularity with its use by blockchains like Polkadot, Avalanche, and Cardano. Ethereum, earlier used Proof of Work but now has shifted its consensus mechanism to proof of stake