In Brief:
The history of bitcoin is kept secure and arranged into sequential blocks using the proof of work consensus mechanism. The proof of work (PoW) consensus mechanism consumes a lot of electrical energy and it has limitations with the number of transactions it can process at once.
Due to these limitations of the proof of work consensus mechanism, a lot of methods are coming up. The aim is to bypass these limitations by starting with cutting the amount of energy used for transaction validation.
Among these methods, the leading method is the proof of stake (PoS) consensus model. The proof of stake consensus mechanism allows the collaboration of computer networks while maintaining their security.
For blockchain networks to run efficiently and effectively, they have to solve some of the problems that come with consensus. One problem that can occur in the blockchain network is double-spending.
So, just like banking and other fintech institutions, the blockchain cryptocurrency networks must make sure that no player in the network spends the same money two times.
Furthermore, the consensus mechanism will not allow the destruction or deviation of the network via a hard fork. In centralized ecosystems, some central bodies and authorities are responsible for validating transactions.
The opposite is the case in the cryptocurrency ecosystem. It is an ecosystem that is community-based, and because of that, the community members will need to be included in the validation of transactions.
For this to happen, all the players have to reach a consensus. It is only when everyone reaches a consensus that transactions will be verified and added to blocks.
To cryptographically get consensus on the various cryptocurrency networks we have today, the two major consensus mechanisms used are PoW and PoS. These two mechanisms are the main validation mechanisms for DeFi (Decentralized Finance) projects today.
When Satoshi Nakamoto created Bitcoin, he wanted a method of validating transactions without having to involve a third party, so he developed a proof of work consensus mechanism for validating transactions.
While PoW focuses on the different agreeing networks to validate transactions, the PoS has a slightly different approach. The PoS is a newer consensus mechanism that validates transactions in DeFi projects.
Some DeFi projects start with PoS, while the rest will start with PoW and then begin to transition to PoS.
PoS seems to have more relevance in our technological world today, but building the network of consensus is not as simple as validating transactions using the PoW network consensus.
Proof of Work and How it Works
The first proposal of PoW was in 1993. It was used to prevent spam emails on networks, also, it was used to prevent attacks based on denial of service. In 2008, with the advent of Bitcoin, Satoshi Nakamoto brought the concept to the limelight.
He used the PoW concept for validating new blocks of data on the Bitcoin blockchain network.
PoW is based on the capacity of users in the network to complete mathematical computational tasks. To solve these complex mathematical computations, users employ nodes.
These nodes are computational powers for solving complex mathematics, and when users use these nodes to solve these complex mathematical equations, they have automatically validated that a new block is added to a chain.
A node is a personal device in the blockchain network used for sending, forwarding, and receiving information within a network of connecting tools. Any user whose node solves the mathematical equation fastest will be the one to link the new block to the old block using cryptography.
As a reward, the user receives a newly mined cryptocurrency (coin). This reward from solving mathematical computations is what is called MINING. Those with nodes trying to solve the mathematical puzzles are MINERS. The process of solving these mathematical computations is called Proof of Work.
Proof of Stake and How it Works
In 2011, people who were concerned with the disadvantages of the PoW mechanisms like large energy consumption, high transaction cost, large computer equipment, and low transaction speed came up to talk about new methods of consensus mechanism.
The discussion took place on the Bitcointalk forum. They proposed a consensus mechanism that will not require tangible work to validate transactions, rather transactions will be validated using an existing verified stake in the network.
In other words, to validate transactions, all you need to do is just show that you have a particular amount of the blockchain’s native cryptocurrency. This consensus mechanism method used to achieve shared consensus on a blockchain network is the PoS consensus mechanism.
Here is a brief description of how the PoS Consensus mechanism works. Let’s assume that we have 4 miners; A, B, C, and D.
If miner A stakes 40 coins of the native tokens, B decided to stake 200, C decided to stake 50, and D decided to stake 30, the priority to validate an addition of a new block to an old one by a cryptographic chain will be a giver to miner B.
The reason is this; the more of the blockchain’s native currency you own, the more your chances of validating transactions and adding new blocks. So the miner with more stakes emerges the winner.
The PoS consensus mechanism came into the picture to solve some of the issues of PoW and to enhance scalability. Scalability now means that this consensus mechanism can now allow blockchain networks to handle more transactions per second than the PoW consensus mechanism.
The major setback of this consensus mechanism is this; only those with more holding will be qualified to compete for validating transactions. It means that most times, this consensus mechanism will only favor those with plenty of money or those who adopted the blockchain network and its native token early enough.
From the explanations above, the two consensus mechanisms have their disadvantages and advantages. Both consensus mechanisms aim to validate transactions, but the difference is this transaction validation is achieved through them.
So, the very clear difference between these two transaction consensus mechanisms is the way they distribute and reward verification of transactions. While PoW works with solving mathematical computations using high energy and fast nodes, PoS works by buying more native tokens and staking them for transaction validations.
