National governments and banks are the biggest authorities when it comes to moderating cash flow and transactions. But one thing that mostly escapes from their sight is cryptocurrency. Despite its control over all financial offerings and platforms, governments and banks are out of reach for cryptocurrency transaction moderation. Even though cryptocurrencies have a democratic system of functioning, the digital currency market still needs regulatory bodies to monitor them. This is where the debate between Proof of Work (PoW) vs Proof of Stake (PoS) makes its debut. Both of those are consensus mechanism that drives the cryptocurrency market towards a state of overview.
The whole cryptocurrency sphere is more or less an independent space where moderation is minimum. However, they are in constant need of a blockchain or consensus mechanism that could help them keep an eye on transactions. Bitcoin became the first blockchain-based cryptocurrency to make its entry into the digital currency landscape. It used blockchain technology to track down the transaction and movement of cryptocurrency. On a positive note, users can publicly view and verify their cryptocurrency trading in real-time. Owing to its leniency, blockchain also has a negative side to transactions. It is impossible to make sure that nobody submits fraudulent transactions to the blockchain or alters past transactions. At a certain point, other participants on the cryptocurrency network volunteer to verify the authenticity of new transactions in exchange for a reward. This verification process is called the ‘consensus mechanism.’ Therefore, cryptocurrencies like bitcoin and Ethereum use Proof of Work (PoW) vs Proof of Stake (PoS) methods to keep track of the transactions.
Proof of Work (PoW): Explained
Proof of Work is a consensus mechanism that detects the frivolous and malicious use of computing power such as sending spam emails, launching denial of service attacks, and fraudulent transactions. The concept of Proof of Work was adapted to secure digital money by Hal Finney in 2004. However, the technology made its debut only in 2009, following which bitcoin became the first adopter. Many other cryptocurrencies followed suit to employ Proof of Work in their internal working system to allow secure transactions and provide decentralized consensus.
Bitcoin is powered and supported by blockchain technology. Blockchain leverages the feature to share ledgers that contain a history of every bitcoin transaction that took place from the very beginning. Each block in bitcoin has certain transaction details stored in it. Proof of Work avails the facility to add new blocks to the bitcoin blockchain. Blocks are accepted into the blockchain system by miners, who execute the Proof of Work method. A new block is accepted by the network each time a miner comes up with a new winning Proof of Work. Every 10 minutes, a new block is accepted by a miner in the Bitcoin sphere. Some of the benefits of Proof of Work are:
- Proof of Work provides protection against DDoS attacks.
- The consensus mechanism encrypts the system from the influence of low fractions of cryptocurrencies owned by the miner in extracting capacity.
- Proof of Work also leverages extraordinary computing capabilities that are mandatory to solve problems and form new blocks. It shields holders of large capital from making decisions for their entire network
- The mechanism imposes certain restrictions on the actions of participants to moderate transactions and close loopholes.
Proof of Stake (PoS): Explained
Proof of Stake is a type of consensus mechanism used by blockchain networks to achieve distributed consensus. Recently, Ethereum started moving from PoW to PoS. Even though Proof of Stake is not as simple as Proof of Work and involves technical challenges, cryptocurrency users still find this safer. The mechanism requires cryptocurrency holders to stake their coins to become a validator in the network. Unlike PoW, here, validators are responsible for ordering transactions and creating new blocks so that all nodes can agree on the state of the network.
Proof of Stake algorithm uses a pseudo-random selection process to select a node to be the validator of the next block, based on a combination of factors that could include the staking age, randomization, and the node’s wealth. Some of the advantages of Proof of Stake are:
- Proof of Stake is more energy efficient as it removes the high-powered computing from the consensus algorithm.
- At Proof of Stake, the risks of centralization are reduced because the reward is proportional to the number of assets in deposit in each custody.
- In a Proof of Stake algorithm, the profitability obtained by the stakeholder is not necessarily linked to the value of the cryptocurrency of the market, but the profitability is a fixed percentage.