New to cryptocurrency and/or unsure of what proof-of-stake (PoS) and proof-of-work (PoW) exactly mean?
Don’t worry, in this article, I will be explaining the difference between them, the pros and cons, and which top 20 coins use which algorithm.
It might be a little bit confusing at first, but once you finished reading this article you will be familiar with the concept and you will be able to explain it to others.
What Is Mining?
Complicated mathematical problems have to be solved in order to update the next block to the blockchain.
A block consists out of a certain amount of transactions. The person who solves the block gets the transaction fees as a reward and possibly coins depending on whether the coin uses the PoW or PoS algorithm. These both differ depending on the currency. In PoS there are no miners, but forgers.
There are many different algorithms that can be used by cryptocurrencies to prove that the transaction is valid. The two most common and important methods are proof-of-work and proof-of-stake.
If you would like to know how to get setup and get started mining, you can take a look at this guide explaining what cryptocurrency mining is.
With proof-of-work, you solve the puzzles to update the block as discussed earlier. Solving these mathematical problems requires computational power. The more computational power you have the faster problems are able to be solved, which leads to a higher chance to get the block rewards.
At first, miners used their central processing unit (CPU), in order to mine, but this wasn’t fast enough and they soon switched to a graphical processing unit (GPU). High-end gaming computers can still mine with high success.
There are also specially designed systems, called ASICs – application-specific integrated circuit – these have taken over most of the mining market as they consume way less power and are more powerful.
As you can see, electricity consumption and power are really important when mining and they have been optimized over the last few years for mining purposes.
Proof-of-work is currently the most used algorithm as Bitcoin was the first cryptocurrency and that uses PoW. Currently, however, people are starting to make the switch to PoS.
The top 20 coins that use PoW are:
- Bitcoin Cash
- Dash (Can be seen as a hybrid)
- Ethereum Classic
- Bitcoin Gold
Proof-of-stake is an alternative to proof-of-work. In this algorithm, there are no miners, but instead forgers. These forgers will validate the transactions and not solve complex mathematical problems like miners do in proof-of-work.
The forgers are selected based on their stake in the currency. For example, a person who has 34% stake in a coin that uses the PoS algorithm can have 34 percent chance to be selected to be the forger who will then validate the transaction or block.
Validating the blocks or transactions is very energy efficient and fast.
There are many different ways PoS can be implemented into coins. But this is the basic principle.
Currently, top 20 coins that use PoS are:
Ethereum (Switching from PoW to PoS soon, using their own protocol; Casper)
- Stellar Lumens
The Battle Between PoW and PoS
Let’s start the battle with the fact that proof-of-work has no way to counter big “cartels’ that set up facilities for mining. Some proof-of-work coins/tokens make it so that mining their currency is ASIC-resistant. However, most of them are not.
Mining cartels are most likely not able to do this with coins that use PoS since they would have to buy a large number of coins and this would be very expensive.
Another point is that Proof-of-work is an intensive process and really inefficient as computers that solve the mathematical puzzles require a lot of power and thus need to be cooled.
For this reason, you will often see big mining companies settle in a cold country to save on cooling the systems.
Proof-of-stake only requires for simple validating, which is environmentally friendly as it doesn’t require such power, it can simply be done by a normal laptop.
In the future, coins that have a set circulation won’t be able to be given out as a reward. This will have an effect on the transactions fees as they will be the only thing that will be handed out as a reward.
Miners will take any reward from this point on and the transaction fees will keep dropping due to this. The number of miners will drop as well because of this and so will the security.
It will be easier to achieve 51% energy power to do a 51% attack on the network as the number of miners is less.
Proof-of-stake doesn’t have this risk as the forgers don’t receive coins when validating and when someone would want to do a 51% attack they would need to own 51% of the coins in circulation. See the quote below by Vitalik Buterin, co-founder of Ethereum:
“The intention is to make 51% attacks extremely expensive, so that even a majority of validators working together cannot roll back final blocks without undertaking an extremely large economic loss – a loss so large that a successful attack would likely on net increase the price of the underlying cryptocurrency.”
As you can see proof-of-stake brings many advantages over proof-of-work coins. Of course, there are coins that use other algorithms, such as proof-of-importance.
In the long run, we will see coins that use the proof-of-stake algorithm take over or who knows, maybe others?
I hope you enjoyed reading my first article and that the difference between the proof-of-stake vs proof-of-work is now clearer. In the near future, I might consider revisiting this topic to write on the proof-of-importance.
BiteMyCoin has made an e-book and it is a great read. If you would like to read through it on topics like this, go get yourself one!