Most people researching cryptocurrencies have at some point come across the terms Proof of Work (PoW) and Proof of Stake (PoS), but relatively few understand them. Questions start with what the terms even mean and move on to how these concepts relate to different cryptocurrencies.

An understanding of Proof of Work and Proof of Stake is crucial for anyone seeking to know more about blockchain, since they govern how transactions are processed by the blockchain network.

With Proof of Work, computing power wins

Whenever units of a cryptocurrency are sent, spent, or moved in any way, a transaction must be recorded by the blockchain network on which the cryptocurrency exists. Transactions are grouped together while they are being processed by the network, and we refer to each group of transactions as a “block”.

To process each block, individuals offer computing power to the blockchain network. We call these individuals “miners”. Each block is associated with a reward of 12.5 Bitcoins, but is also locked behind an arbitrary cryptographic puzzle (essentially a complex math problem).

Whichever miner solves the puzzle first receives the honor of recording the transactions in the block and earning the reward.

The miner who solves the puzzle first is likely the miner who has spent the most processing power on it, and thus done the most “work”. Hence, Proof of Work refers to a method of allocating rewards to miners based on the amount of processing power used to solve each block’s problem.

The problem with Proof of Work: Electricity and money usage

Proof of Work is expensive. Since miners are competing to solve each block first, there is an incentive to dedicate as much processing power as possible to this task.

The problem is that all this processing power spends a great deal of electricity. According to some studies, Bitcoin’s Proof of Work system will be using up as much energy as all of Denmark by 2020.

Many people view this as a waste, since this energy is just being used to solve arbitrary math puzzles. This is where Proof of Stake comes in.

Proof of Stake Means that those who own more cryptocurrency win

Proof of Stake is a proposed solution to the energy waste caused by the Proof of Work system. Under Proof of Stake, the miner who receives the reward for each block is not the one who spends a great deal of processing power to solve a complex math puzzle the fastest, but one who has a great deal of skin (i.e. stake) in the game.

The blockchain network assigns each miner a score based on factors such as how many coins the miner owns, and how long those coins have been held untouched. Miners who own the greatest amount of coins stored untouched in a single location would receive the highest score.

Due to this scoring system, wealthier miners will have an advantage over everyone else, and newcomers will find it difficult to compete unless they pool together all their resources.

The network will select a winner for each block based on randomization and each miner’s score. Therefore, having a higher score will increase the likelihood of being selected, but having the highest score by no means guarantees selection.

Proof of Stake doesn’t require miners to dedicate processing power to solving complex math puzzles, so replacing Proof of Work with Proof of Stake could save a significant amount of energy. Mining under the Proof of Stake system could be a background process on an ordinary laptop, whereas mining under the Proof of Work system requires farms of specialized number-crunching hardware.

Proof of Work is still the standard

The most well known cryptocurrencies all still use Proof of Work. For example, Bitcoin, Ethereum, and Litecoin all currently use Proof of Work.

BlackCoin, NXT, and ReddCoin are some of the more popular Proof of Stake Coins, but most of these coins have yet to hit mainstream audiences.

So why does Proof of Stake matter?

Despite the fact that Proof of Stake is not used by the most popular cryptocurrencies, it has a major advantage over Proof of Work in terms of energy efficiency.

Due to this advantage, Ethereum’s developers are planning to switch Ethereum to Proof of Stake from Proof of Work.

Ethereum’s proposed implementation of Proof of Stake is termed “Casper”, and several whitepapers detailing how the technical details behind Casper were released on Github this September.

With all the media attention surrounding Ethereum, its upcoming switch over to Proof of Stake could signal the start of a wider adoption of Proof of Stake of cryptocurrencies.

Keep an eye on Proof of Stake in the future

Proof of Work requires miners to solve arbitrary math problems, which unnecessarily expends a great deal of energy, and Proof of Stake has arisen as an alternative method to incentivize miners to process transactions on the blockchain.

So far, Proof of Stake is not commonly seen in cryptocurrencies, but Ethereum is setting a precedent by moving forward with the intention of implementing Casper.

Whatever the case, this battle is one to keep an eye on, as underlying protocols such as Proof of Work and Proof of Stake have a major impact on fundamental attributes of every cryptocurrency, including transaction fees, network security, and network latency.

 

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