Proof-of-Stake (PoS) vs Proof-of-Work (PoW)

Blockchain • Lesson 3

OK, so we know that blockchain is a decentralized distributed network where transactions are verified by the participating nodes. These nodes verify new blockchain transactions in two ways.

By solving complex mathematical puzzles, known as proof-of-work (PoW) or by staking tokens, known as proof-of-stake (PoS).

The PoW model uses cryptography to encrypt each transaction. Then, the participating nodes compete against each other who will be the first to solve the complex puzzle and, in doing so, validate the next block to be added onto the blockchain.

On the other hand, the PoS model uses a completely different approach to reach consensus, verify transactions, and validate the block. Here, individuals stake their tokens for a chance to be chosen as the next validator to add the next block of transactions onto the blockchain. Although the selection is random, the higher the number of staked tokens one has, the higher the chance to be selected.

In simple terms, staked tokens is the quantity of coins that one has dedicated towards facilitating and validating transactions. Bitcoin, and many other cryptocurrencies use the proof-of-work (PoW) model. However, it has one major concern; it is not very energy efficient.

As a result, the PoS model is becoming more and more popular. In fact, Ethereum, the second-largest cryptocurrency by market cap, has made the decision to switch from a PoW to a PoS model.

But now you might be wondering why peers dedicate their time and resources to validate transactions for blockchains? The answer is simple. They get rewards.

The chosen validator or the first node to solve a mathematical equation is rewarded with the blockchain’s native cryptocurrency. For example, if one validates a block of transactions for the Ethereum blockchain, they will receive Ether as a reward. It goes without saying that the miner who validates the next block of transactions on the Bitcoin blockchain, gets bitcoin as a reward.

Also available in

Deutsch

This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration for your personal investment objectives, financial circumstances, or needs.

Need Help? Visit our Help Section

NAGA is a trademark of The NAGA Group AG, a German based FinTech company publicly listed on the Frankfurt Stock Exchange | WKN: A161NR | ISIN: DE000A161NR7.

The website is operated by KEY WAY MARKETS LTD a Company limited by shares that is formed and registered under the Laws of the Abu Dhabi Global Market (“ADGM”) under license number 000003041, authorized and regulated by the Financial Services Regulatory Authority (“FSRA”) with Financial Services Permission Number 190005, having its registered offices at Office 2, 21st Floor, Al Sila Tower, ADGM Square, Al Maryah Island, Abu Dhabi, United Arab Emirates (“the Company”).

The Company is authorized to provide financial products and services to Retail Clients and to persons who meet the qualifying criteria of a Professional Client as defined in the ADGM Conduct of Business Module. Partner Company: NAGA Markets Europe Ltd, authorized and regulated by the Cyprus Securities and Exchange Commission ("CySEC") under license No. 204/13 with registered address at Agias Zonis 11, Limassol, 3027, Cyprus.

RISK WARNING: Trading leveraged products (CFDs) and real shares involves significant risk, including the potential loss of your initial investment, and may not be suitable for all investors. Before trading or investing, you are strongly advised to read and ensure you understand the relevant Risk Disclosure and warnings included in the Company's legal documents section. There is a substantial risk that you may lose all of your initial investment when trading or investing. We recommend that you carefully consider whether trading leveraged products or investing in shares is appropriate for you in light of your personal circumstances, and ensure you fully understand all associated risks before proceeding. 24.46% of retail investor accounts generate profits when trading leveraged products with this provider. Trading with NAGA Trader by following and/or copying or replicating the trades of other traders involves high levels of risks, even when following and/or copying or replicating the top-performing traders. Such risks include the risk that you may be following/copying the trading decisions of possibly inexperienced/unprofessional traders, or traders whose ultimate purpose or intention, or financial status may differ from yours. Before making an investment decision, you should rely on your own assessment of the person making the trading decisions and the terms of all the legal documentation.

Disclaimer: The content on this page is for informational purposes only and is not intended as a recommendation or advice. Any references to past performance, emulated performance, or forecasts in the Company’s advertisements are not reliable indicators of future results. Customers are solely responsible for their own business decisions or investments.