A distributed ledger includes the details of all previous transactions as it is stored across a network of computers across the world. It ensures that the entire network agrees with the content of the ledger collectively. Behind most of the crypto assets lies consensus mechanism, which verifies that the added information is valid and prevents double-spending and prevents the network from being derailed through constant forking.
The most popular consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS), other than that Delegated Proof of Stake (DPoS) and Federated Byzantine Agreement (FBA) also exists. You will understand why is PoS better than PoW after going through the article.
Let us have a look at the difference between Proof of Stake and Proof of Work (PoS vs PoW):
Proof of Work is one of the initial mining algorithms, where a group of transactions is bundled in the mempool, the miners verify whether the transactions are legitimate by solving an algorithmic puzzle. The first one to solve the puzzle gets rewarded, like 12.5 BTC for Bitcoin mining. (Proof of Work explained simply)
Proof of Stake doesn’t involve any mathematical puzzle but the creator of the new block is chosen based on their stake as in how many coins or tokens one owns. This process has higher energy efficiency. Under PoS, there is no coin creation, as all the coins are created in the beginning.
#2 Cost and Energy
Proof of Work is energy-intensive as more computational power is needed while Proof of Stake is cost and energy-efficient, as they don’t need large machines and electricity to compute, as in PoW the competition for the reward makes the miners invest on machines which are hazardous to the environment. Hence, Proof of Stake is more accessible to the community.
As Proof of Stake is relatively new, the rate of adoption is lesser, and moreover, few potential risks have been identified. In Proof of Work systems, when a blockchain is forked, the miners will have to either continue supporting the actual blockchain or switch to the newer forked blockchain. PoW discourages constant forking considering the economic perspective.
Proof of Stake does not discourage forking. A participant doesn’t have to increase their stake in order to validate transactions on multiple copies of a blockchain, hence, there is no economic incentive preventing this bad behavior. Ethereum is planning to switch to PoS protocol called Casper very soon, in which the validators are required to submit a minimum deposit to participate.
For Proof of Work, the role of mining is becoming reserved for large scale operations whereas Proof of Stake offers a fair solution, wherein the amount of network control is directly proportional to the amount they invest. The more they invest, the more they are in control.
Proof of Work is becoming very less profitable and the level of difficulty in mining is urging the miners to invest more in the machines, whereby the ROI can be lesser or even zero. As Bitcoin is an example of a PoW working mechanism, PoS system cryptocurrency includes Dash.