PoW and PoS in mining

It is impossible to spoof the inputs. If a node tries to put invalid solutions in there, other participants in the network will reject the changes. To illustrate this, a labor contract can be presented. The document contains the requirements and conditions of employment. If someone tries to change them, the hash string will be different and everyone in the network will know that the agreement is invalid.

Advantages

PoW is essentially a system for authenticating transactions without involving a third party. The algorithm presents a robust mechanism to achieve consensus and prevent tampering with the blockchain. It makes it difficult to change any part of the registry, thus ensuring that every transaction is authentic and traceable.

PoW also protects the network from attacks. These would require large amounts of computing power to execute. In theory, an unscrupulous mining participant could tamper with the blockchain, but the costs would far outweigh the potential benefits.

Disadvantages

Proof-of-work has notable disadvantages that have led to the emergence of alternative consensus algorithms. These include:

• Huge costs. Mining cryptocurrencies requires expensive equipment. Costs drive up energy bills.
• “Uselessness” of the computation. This is one of the differences between PoW and PoS in mining. Mining techniques do a lot of work to create blocks and consume a lot of energy. However, these calculations are not applicable in other areas.
• Centralization. In February 2023, the Foundry USA mining pool controls 31.8% of Bitcoin’s hashrate. If that figure reaches 51%, miners could collude and launch an attack. This would lead to complete centralization.

What is Proof-of-Stake (PoS)

For a few years, PoW was the only consensus algorithm. However, it has developed problems. As Bitcoin mining became more popular every year, the complexity of the network was constantly increasing. Users could no longer mine assets using CPUs or GPUs. This forced participants to buy powerful hardware (ASIC). Such equipment consumes a lot of electricity and harms the environment. In addition, some groups of miners began to make up a large percentage of the network hashrate. Then new mechanisms, such as Proof-of-Stake, appeared.

PoS is a Proof-of-Stake algorithm used in the blockchain to process and verify transactions. Unlike Proof-of-Work (PoW), where participants need special hardware, Proof-of-Stake uses less energy. The system involves investing your own money. This is the main difference between PoW and PoS in mining.

Principle of operation

In the Proof-of-Stake protocol, you do not need to calculate complex mathematical equations. It is enough to have a certain amount of digital coins on your account.

Validators play the main role in PoS mining. They put the coins in the staking and deal with validating transactions. The system randomly selects a node that will add a new block. It’s like a lottery – the more blocked tokens, the higher the probability of becoming a validator. For example, the Ethereum network requires a minimum deposit of 32 ETH (about $52k).

Under Proof-of-Stake consensus, users can link their tokens to a specific validator. It should be noted that assets are not transferred to another wallet.

The locked cryptocurrency can be considered as a security deposit. The selected participant who authenticates a fraudulent transaction on the blockchain will be fined.

Benefits

Proof-of-Stake aims to address the shortcomings of PoW. The PoS algorithm is much more energy efficient. There is no mining process involved here, which requires significant resources.

Another plus point is that it reduces the risk of 51% attack, in which a certain group of individuals can control a large portion of hashing to use it for personal gain. This is difficult to accomplish because the attacker can lose the locked tokens. In large networks such as Ethereum, he would have to spend several million dollars. In comparison, in PoW mining, users will not lose their hardware if they conduct a 51% attack.

Other advantages of the Proof-of-Stake consensus mechanism:

• Users who place tokens into staking receive coins as a reward for their contribution.
• PoS is greener than PoW.
• Proof-of-Stake blockchains are more scalable. The network is decentralized and allows more individuals and groups to participate.

Disadvantages

Proof-of-Stake is seen as a fair and equitable mining system. However, this algorithm has disadvantages:

• PoS cryptocurrencies tend to have an unlimited maximum supply. This contributes to inflation.
• High risk of 51% attack in small networks.
• Whales can send a lot of digital coins into staking. Such large holders are able to influence votes and determine the future development of the network.
• Since Proof-of-Stake is a relatively new algorithm, its security is not fully proven. Proof-of-Work provides a more reliable consensus mechanism.

The main differences between PoW and PoS mining

The algorithms use different methods to achieve consensus. There are other differences between PoW and PoS mining. See the table for more details.

Frequently Asked Questions