All the miners, BTC holders, and cryptocurrency traders have to encounter the terms " proof of work " and " proof of stake " at some point. These two terms are something that any digital currency enthusiast should know. Before explaining these two important terms, it's essential to quickly go through the story of cryptocurrency mining.
Mining for coins is a process of validation of transactions and blocks in the Blockchain network by series of complex algorithms. Those algorithms serve to prove and validate the exactitude of transactions and to add each new block to the main chain. In order to get involved in cryptocurrency mining, you should have a computer with a very powerful processor that is able to run continuously along numerous complex mining algorithms.
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When a transaction needs to be executed, its validation speed largely depends on computers involved. It means that more the computer power and more the computers there are, validation of transaction will be faster than other miners in the Bitcoin network, which can bring Bitcoin rewards more often. Everyone who possesses a good hardware and proper setup can become a cryptocurrency miner.
Proof of Work (PoW)
The proof of work (PoW) is the type of validation of the transaction that happened and a proof of its exactitude. BTC and numerous altcoins are based on this consensus protocol that ensures the originality of the chain.
It can be explained by an example of a math test in a classroom full of students. If there is a student who can find the right answer to the problem and also provide the full proof (step by step) of coming to the final and correct result, he/she gets an extra reward. This student would also need more brain power than others, which would also require more energy from his\her body.
Now, when we switch to the digital currency world, that math test would be a transaction, the classroom would be the world, and student represents the hardware or computer that works with complex algorithms. The brain power would represent the computing power and the energy from the body would mean a large amount of electric power.
Proof of work as a method has its own advantages and disadvantages, and here are some of them:
- It needs a lot of electric power which increases the cost
- High-quality computer hardware that is quite expensive
- Miners can relocate the hardware to mine some other coins if the reward is bigger
- With more types of coins being released, rewards for miners can be smaller as the amount of coin may become insufficient to mine
Proof of Stake (PoS)
Proof of stake is the alternative type of verification and validation of transactions and blocks. Here, the miner is called validator, and the amount of coins is a stake. So, this method chooses the validator by the amount of stake that validator has and the age of the stake. It means that if somebody has 10,000 ETH coins in a crypto wallet, the age will be attached to it, showing how long these coins are in possession. Those 10,000 coins represent the stake. If a person chooses to move the coins from one wallet to another, the age is reset. The amount of coins here is a sort of security deposit. It means that the validator has a large stake in ETH with good aging, and would get more chances to validate a block. This system made people create a distributed and trusted network with the most loyal validators. These validators get one part of or even whole transaction fee. In proof of stake, it is not called mining, but forging. It is done by the validator who processes and forges a blockchain.
As it was the case with proof of work model, this one also has its own advantages and disadvantages:
- Expensive hardware is not a necessity here, as normal computers and laptops can run the coin's validator client when they are online
- It doesn't consume too much energy, so it's energy efficient
- The higher the stake those validators possess for a long time, the more chances can be chosen for forging
- Validations are generally faster
In proof of stake, validators possess a certain stake in the network that they bond. In case of Ethereum, it is Ether. Bonding stake is when people deposit a certain amount of money into the network and use it as a collateral to vouch for a block. In proof of work, people know that a chain is correct because of the loads of work that was done previously, while in case of proof of stake, people have to trust the chain with the biggest collateral.In proof of stake, validators possess a certain stake in the network that they bond. In case of Ethereum, it is Ether.