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Proof of Work vs. Proof of Stake: What’s the Difference?

Ethereum is one of the most popular and widely-adopted cryptocurrency projects. Therefore, any significant change to its protocol is interesting news for traders.

This year could prove to be one of the most pivotal in Ethereum’s development, as several key changes are on the horizon. These changes include the upcoming Constantinople hard fork and a planned shift from proof of work to proof of stake. The latter would be the most substantial and important change in Ethereum’s history.

To help you better understand what these concepts mean, let’s take a closer look at the basics of proof of work and proof of stake and how they differ in key respects.

What is Proof of Work?

Proof of work is a consensus algorithm used to secure a blockchain network and enable transactions. While the idea of proof of work pre-dates Bitcoin, its first widespread implementation occurred within the Bitcoin blockchain.

Under Bitcoin’s proof of work system, so-called “miners” compete to validate transactions and introduce new Bitcoins into the system by using computing power to solve complex cryptographic computations. Bitcoin transactions are included within newly mined blocks added to the chain. Miners earn transaction fees by being the first to solve each computation.

Securing a network via proof of work mining requires significant energy resources, as the electricity required to provide enough hash power to solve computations  and validate transactions is considerable. Competing miners use the block rewards to offset their energy expenses and hopefully net a profit in proof of work.

Because proof of work was the first consensus algorithm used in cryptocurrency, many of the projects that followed Bitcoin adopted the system, including Litecoin and Ethereum.

Ethereum, however, is preparing to switch to an innovative new system designed to address some of proof of work’s issues: proof of stake.

What is Proof of Stake?

The concept of proof of stake differs from proof of work in several key respects. First, proof of stake allows people to mine or validate transactions based on how many coins or tokens they hold, rather than how much mining power they possess. In Ethereum’s case, it’s projected that anyone who holds at least 32 Ether will be able to act as a validator of transactions on the network.

Securing a network via proof of work mining requires significant energy resources. The electricity required to provide enough hash power to solve puzzles and validate transactions is considerable. Dependent on their source of electricity, some miners may have large electricity bills, which can result in a need to sell their coins and tokens to cover expenses. If this happens to a significant number of miners at once, it can create downward pressure on the price of the cryptocurrency being mined. While proof of work validation is called “mining”, in order to avoid confusion with the concept of mining, proof of stake validation can be called “forging”.

Proof of stake aims to help mitigate the energy demand problem by linking validation, or forging, power to proportion of coins and tokens held by the validator rather than through the use of computing power. In other words, the more Ether you have, the more forging power you have. If you own 0.01-percent of the total supply of Ether, you’re theoretically limited to validating only 0.01-percent of the blocks.

Proof of stake can also “future proof” networks to some degree. Under Bitcoin’s proof of work system, block rewards for mining decrease over time and all Bitcoins will one day be mined. This means that, eventually, the only incentive for mining will come in the form of transaction fees.

This could make Bitcoin more vulnerable to a 51-percent attack (when a mining pool controls a majority of computational power and creates false transaction blocks) or other security issues. Under proof-of-stake, an attacker would need 51-percent of the total supply of coins and tokens, an unrealistic scenario for truly decentralized projects.

Anyone who is interested in Ethereum should carefully monitor the progress of the planned proof of stake change and its results.




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