Proof of work VS. Proof of Stake
ETHUSDTBefore Ethereum merge lets dive in little bit in fundamentals
At the core of each cryptocurrency is a network of computers that helps keep software safe from hackers and controls how many new units can be made available. The consensus mechanism is the name for this set of rules. Proof of Work (PoW) and Proof of Stake (PoS) are the two most common consensus mechanisms. They both control the way that transactions between users are checked and added to the public blockchain ledger without the help of a central party.
Understanding the differences can help you decide which cryptocurrencies to add to your portfolio. For example, cryptocurrencies that use Proof of Stake may come with more responsibilities or benefits.
What does PoW (Proof of Work) mean?
In the early 1990s, Proof of Work (PoW) was created as a way to stop email spam.
It was thought that computers might have to do a little bit of work before sending an email. This job would be easy for someone sending a real email, but sending a lot of emails would take a lot of processing power and resources from users. But Satoshi Nakamoto, the person who made Bitcoin, was the first person to use the technology in a digital money system. He did this in the Bitcoin white paper.
Blockchai
Blockchain is a system made up of a chain of blocks, which are groups of transactions that are put in order by the time they were done. The software for the PoW blockchain has the genesis block, also called block 0, hardcoded into it. This block doesn't connect to the one before it because that's how it's made. Blocks that are added to the chain always refer to blocks that came before them, and each block has a copy of the whole updated book.
Costs of energy
PoW algorithms decide who can make changes to the ledger by setting up a race in which some participants (called "miners") are asked to use a lot of computing power to come up with valid blocks that follow the rules of the network. The nodes, which are any computer running the Bitcoin software, then verify the transactions, stop double spending (sending the same amount of money to two different people), and decide if the proposed blocks should be added to the chain. Miners on the PoW network compete to solve hard math problems, which is called "hashing," in order to make a new block. These puzzles are very hard to solve, but the network should be able to easily check that the answer is correct.
Participation
In the PoW protocol, computing power and cryptography are used together to reach a consensus and make sure that transactions on the blockchain are valid. Miners try to get the right answer to math problems during the hashing process and when making new blocks. To do this, miners try to figure out a string of numbers that seems to be random, called a hash. This, along with the data in the block, should produce a result that meets the conditions set by the protocol when it is run through a computer with a hash function. The winner's hash is then sent to the network so that other miners can check if the answer is correct. If the answer is right, the block is added to the block chain, and the miner gets a block reward.
Giving out the prizes
The block reward is the new cryptocurrency that is given to the miner by the blockchain for each valid block that the network accepts. After a certain number of blocks have been found, the block reward for some cryptocurrencies, like Bitcoin, goes down. This is to make sure that the total amount of money stays fixed and doesn't keep growing.
What does PoS stand for?
Proof of Stake (PoS) is a change to Proof of Work (PoW) that was made in 2012 to get rid of the idea that the blockchain's order was based on how much energy was used. Instead of having computers compete to make the matching hash, the PoS protocol is based on the idea that participation is determined by who owns a certain number of coins. Using a set of factors set by the protocol, the Proof-of-Stake (PoS) algorithm chooses a node (anyone who owns the coin) to propose the next block to the blockchain in a way that looks like it was chosen at random. When a node is chosen, its job is to check that the transactions in the block are correct, sign the block, and send it to the network to be checked.
Blockchain Order
Similar to PoW, a PoS blockchain is a system made up of a chain of blocks that are put in order by the time they were created. The genesis block is the name for the first block in the PoS blockchain, which is also hardcoded into the software. Blocks that are added to the chain always refer to blocks that came before them, and each block has a copy of the whole updated book. In Proof-of-Stake (PoS) currencies, there is no competition for who gets to add blocks. Because of this, blocks are often called "forged" or "minted" instead of "mined."
Costs of energy
PoS blockchains are different from PoW blockchains in that who can offer blocks is not just based on how much computing power and energy is used. People who like PoS often say that it is a "more energy-efficient" system because each node is in charge of making new blocks instead of competing with other nodes. Since both PoW mining and PoS minting require energy, mining and minting nodes want to use the cheapest form of electricity possible. This is usually from renewable sources like hydroelectric power, wind power, or solar power, not from sources that release greenhouse gases like coal. Also, PoS blockchains need to use specialized hardware (GPUs), which, like PoW mining hardware (ASICs) and other computers, costs money to make. PoS miners also have to keep their internet connections up and running, which takes energy.
Participation
Users who want to be chosen to add blocks to the PoS blockchain must stake or lock up a certain amount of blockchain currency in a special contract. How likely they are to be the next person to make a block is based on how many coins they bet. If a user does something bad, they might lose their share as a punishment. So that the richest nodes don't always win, PoS may use other factors to decide. These can be things like how long the node staked its coins or just pure chance.
Giving out the prizes
Similar to the PoW algorithm, the block reward in PoS is the cryptocurrency that the blockchain gives to the user who offers a valid block. But since blocks are chosen based on who owns the coins, exchanges may offer "staking" services that let users stake money on their behalf in exchange for more frequent payouts.
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