What are Proof-of-Work & Proof-of-Stake?

Cryptocurrencies live on blockchain networks. And the key to blockchain technology is that it only works when many computers worldwide agree that a transaction took place and should be rightfully logged in its ever-growing ledger. For blockchains, the coin of the realm is consensus: many computers need to agree on what information gets stored. But did you know there is more than one way validators on a blockchain can reach consensus? 

Indeed, how a blockchain's validator nodes reach consensus often determines how secure the blockchain is—since its ability to keep correct, incorruptible information across a widespread network of computers is the very point of blockchain technology. The two most common approaches to finding consensus on a blockchain are proof-of-work (PoW) and proof-of-stake (PoS). Here’s how they work.

Proof-of-Work: The Old Guard

The proof-of-work model is a race. Within the greater blockchain ecosystem, different computer nodes, called “miners,” compete to be the first to solve a cryptographic puzzle. Once a miner finds the solution, other computers confirm it’s correct. (It’s far simpler to confirm an answer than to find one.) The winning miner then gets to record a block of transactions on the chain—and receives crypto as a reward. Then the next race begins.

But participating in the race requires enormous processing power and specialized machines that often come up with billions upon billions of possible solutions each second. (The best way to solve a proof-of-work puzzle tends to be trial-and-error.) Years ago, people could successfully mine Bitcoin on their laptops, but doing so today would be like entering your 2010 Prius into a Formula 1 race: cute but futile.

That is the problem with the proof-of-work model: it takes a lot of collective work—which consumes a lot of energy—at a time when much of the world is trying to use less energy to stop climate change.

Proof-of-Stake: The New Path

Proof-of-stake is a newer approach that dramatically reduces the energy consumption of reaching consensus—and comes with other benefits too. To participate in a proof-of-stake model, contributing nodes—called “validators”—don’t need hulking hardware. They simply need to offer up some of their crypto as collateral: to “stake” it. Validators that have staked at least the minimum required amount of crypto as collateral get a chance at being selected to add to the blockchain and be rewarded with crypto. In most blockchains, validators tend to be chosen based on how much crypto they’ve staked and how long that crypto has been staked. 

Once a validator is selected for a particular round, other validators confirm that their contribution is accurate. But if the validator is wrong, they’re heavily penalized through a process called slashing, in which they lose most of their staked crypto and rewards. The penalty for corruption is much higher than the reward for validating, which keeps the validators motivated and honest. Additionally, validators can be penalized for not being active and not continuously having their collateral accessible to ensure the network has a healthy amount of validators confirming transactions at all times.

This system enables validators to focus less on protecting the system from having false information inserted and more on executing transactions and verifying blocks. Indeed, at any given moment, many proof-of-work miners’ primary use isn’t validating a transaction but standing by and, effectively, collectively guarding against such an attack. This singular focus tends to make proof-of-stake blockchains more energy efficient since it doesn’t need an abundance of validators moonlighting as de facto guards. It also leads to proof-of-stake blockchains validating transactions far more quickly.

The Other Reason Consensus Models Matter

Those who are just starting to get into crypto may wonder why the difference in these two models is significant to them. After all, the technical side of crypto can get hairy in a hurry. But it’s the technical details that reveal a system’s values. They determine a blockchain’s security, efficiency, and environmental effect. And so, understanding a little more about how a consensus model works could inform which ones you choose to support, explore, or even build on.

Next Lesson: What is a Carbon Neutral Blockchain?
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