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Crypto 101

Proof of Work VS Proof of Stake

Comparing two methods of digital asset mining.

What is Proof of Work?

Proof of Work (PoW) is the process required to verify and add new transactions to a blockchain and create new digital asset tokens. It is commonly referred to as a “consensus mechanism” because it can systematize work across a decentralized network, create consensus across a blockchain, and promote security. Bitcoin, the first cryptocurrency, was the first digital asset to implement PoW mining in order to deter malicious behavior and protect transactions. PoW is a proven way to maintain a secure decentralized blockchain.

How does Proof of Work operate?

Miners worldwide contribute to blockchains through PoW by competing to solve a math puzzle for a reward, thereby gaining permission to update a blockchain. The first miner to solve the mathematical puzzle is compensated with a reward for their effort. The reward is typically a value of cryptocurrency native to that respective blockchain. PoW incentivizes miners to use specialized mining hardware and stronger computing power to increase their chances of solving the block’s puzzle and receiving a reward.

What is Proof of Stake?

Proof of Stake (PoS) is the newer consensus mechanism that powers Ethereum 2.0, Cardano, Tezos, and other digital assets. PoS is faster and less resource-intensive than PoW. PoS maximizes speed and efficiency, with lower fees. PoS network participants add PoS blocks through a process called staking. Individuals known as “validators” contribute - or “stake”- their digital assets in exchange for the opportunity to validate new transactions, update the blockchain, and earn rewards. The selection of validators by the network is based on the amount of native digital assets they have staked in the pool, and the length of time they have been staking. Essentially, participants with more assets staked on a PoS blockchain are rewarded.

When a validator adds a new block of transactions to the blockchain, other validators attest to the accuracy of the block. Once a threshold of attestations has been reached, the blockchain is updated. All participating validators receive rewards in the blockchain’s native digital asset.

Why is Proof of Stake gaining popularity?

PoS is considered a more efficient solution to digital asset mining. Because PoS blockchains do not require validators to spend duplicative energy and electricity competing to solve the same math puzzle, PoS networks can operate more effectively. We see some digital asset blockchains migrating to PoS for these reasons.