Already a client? Click here to login!

Proof of Work vs Proof of Stake

As you may know, people all around the world have been getting more and more excited about Bitcoin and Blockchain and the whole Cryptocurrency eco-system.

The main reason for this is the fact that it is a digital alternative to the old school fiat monetary system of banks, paper money and “middlemen.”

In other words, people are loving it because it is a DECENTRALIZED system, peer-to-peer, cutting out the middleman (and fees!) altogether.

On the face of it, completing transactions person-to-person on trust may sound risky which is why a “consensus mechanism” was built into the Bitcoin Blockchain when it was first launched.

This basically means all the computers in a crypto network have to agree on which transactions are legitimate. Which in turn makes all transactions visible to everyone in the network. This in turn helps to prevent fraud, scamming, and hacking.

There are currently two consensus mechanisms in operation.

The first one is “Proof of Work” (PoW) and is the one that was launched with Bitcoin and the first blockchain network around a decade ago.

The newest is “Proof of Stake” (PoS) adopted by the second largest crypto, Ethereum (soon to be Ethereum 2.0) and others.

Proof of Work (PoW)

It’s called Proof of Work because first generation blockchain and cryptocurrencies only happened thanks to “mining.”

This, essentially, involves mega-computers crunching numbers and algorithms to solve a highly complex maths puzzle. It’s a time-consuming, electricity/energy guzzling process that can take months to create just ONE bitcoin, crypto or block for the blockchain.

For a blockchain transaction to be recognized, it must be appended to the blockchain.

It’s this process that keep the blockchain and cryptocurrency decentralized and maintains the peer-to-peer transparency and with it, the all-important security which makes it robust, and subsequently very powerful.

It’s because mining requires so much processing power, it makes it infeasible for an individual or group to get involved and potentially put a spanner in the works, so to speak. 

BUT… this energy-intensive aspect also prevents crypto blockchains like Bitcoin from scaling or growing as an entity because it more or less just deals with incoming and outgoing transactions.

This is why Ethereum and others have started using PoS.

Proof of Stake (PoS)

The developers at Ethereum knew early on that PoW would prove to be limited when it came to questions of scalability.

So it turned out when Ethereum forged plans to start offering decentralized finance opportunities (DeFi), along with stablecoin, smart contracts and NFT’s.

The “old” mining techniques just couldn’t handle such growth, hence, Ethereum has been building its ETH2 blockchain using PoS since December 2020 which is estimated to be up and running by end of 2022.

In essence, PoS blockchains are similar to PoW as it works by using “validators.” They “stake” their own crypto in hope of getting to validate new transactions. This in turn updates the blockchain and earns the “validator” a reward.

These are in proportion to the quantity of holdings they possess in the associated cryptocurrency.

You also need to possess a decent amount of technical knowledge and have a relatively high amount of the associated crypto.

However, you can also join a “staking pool” with others if you don’t have enough Ethereum, for instance.

Coinbase runs a pooling system which is also known as “delegating.”

Cardano, Tezos, and Atmos all use PoS.

The ultimate aim of PoS is to make it speedier while reducing fees.

Create Indestructible Wealth For You And Your Family So That You Finally Have Financial Security ... Forever!

Our Traders review 600+ stocks and cryptos every single month to find the most lucrative, tactical, and timely opportunities that YOU can take advantage of.

Share this article on:

Related Article

Table of Contents

Get Smarter About Investing

Sign Up to IM Insider now and get the latest market news delivered to your inbox. Our proven methods have helped over 50,000 people grow their wealth.