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.

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