In the world of cryptocurrencies, coins and tokens generally fall into one or two camps. They are either Proof Of Work (PoW) or Proof Of Stake (PoS) (There are a few other methods too). While these consensus algorithms perform much of the same functions, they work quite differently, and as a cryptocurrency newbie, you may be confused by these differing protocols. In this article, we’re going to go over the differences between these two methods of minting coins. Which one is better for you to begin mining your own coins will heavily depend upon your technical skills and the resources that are available to you.
Proof of Work (PoW)
How is Proof of Work consensus reached?
The Proof of Work consensus method was created to protect the network from malicious attacks that could compromise the trustworthiness of the entire currency. Every transaction must be validated by a miner, and to do this they must each solve complex mathematical problems that require a lot of time and resources.
Without the “work” involved in this step, anyone would be able to create a block, and then present it as valid. Since real-world resources such as electricity and hardware are required in order to solve blocks it makes it far more difficult to try to cheat the system. In most cases, it would require more upfront investment that could be returned to do so, thus providing a layer of protection for transactions. Bad players can not misrepresent themselves or the amount of power they hold within the network to achieve financial gain.
By limiting the amount of power that one person can hold based on financial restraints it keeps them from being able to control the majority vote of the network. Which makes it safe for the blockchain to use these mining transactions to form a “consensus” based on all of the players actively involved in the network. It can use the answers returned by their machines to estimate how many individuals agree with blockchain in its current state.
- All transactions must be validated by miners for authenticity.
- Real world resources keep bad players from cheating.
- Consensus must be reached using data from all network participants.
- Decentralization keeps any one group from controlling the entire network.
Where do the miners come into play for Proof Of Work?
Proof of Work is the original method for minting coins. This process requires that the user’s computer does all the heavy lifting, and to “prove” their contribution to the network. The most important component of a mining PC is the graphics card. A graphics card creates what is known as the “hash rate”, and the better your hash rate is the more capable your computer will be at minting. In today’s mining environment you will likely need a very powerful graphics card in order to mint any coins, even on a network with a much lower difficulty rating.
Those who wish to mine using the PoW method use specialized mining software that performs tasks using their PC’s resources. Essentially, the blockchain presents “problems” to the computers in question which they are then asked to solve. Whichever machine can solve these queries the fastest will be rewarded with the block and the number of coins that block represents. This is how the miners earn their money, and this incentivization is what keeps them working hard to secure the network.
What does all this do for the network’s non-miner users though? The miners are responsible for keeping everything running smoothly These “blocks” are actually bundled transactions that are waiting to be confirmed. Every time you send any amount of cryptocurrency to someone else, that transaction needs to be confirmed by a miner. This establishes not only a decentralized network for payments, but it also creates an automated trust system that is the basis for many cryptocurrencies, including Bitcoin.
Pros of Proof of Work minting
- Users can mint coins with no initial investment.
- Allows gamers and hobbyists to earn from their PCs.
Cons of Proof Of Work minting
- Modern PoW mining requires a good deal of expensive equipment.
- It’s not very ecologically friendly and requires a great deal of electricity.
- Experiences difficulty in scalability once a currency gets to a certain volume.
- Transaction fees can become very expensive if the network becomes clogged.
Proof of Stake (PoS)
How is Proof of Stake consensus reached?
The Proof of Stake consensus method was created to be more efficient than that of the Proof of Work method which requires a lot of resources. However, a system such as this also requires more trust than Proof of Work does, and some are afraid it may encourage foul play within their respective networks.
Instead of the consensus originating from how much of the network’s mining power agrees with the state of the blockchain, instead, it comes from how much wealth agrees with it. The idea being that someone who is heavily invested in the system will behave in the best interest of the blockchain itself to grow their investment. However, some people disagree with this and feel that it could cause some people to become bad actors. Especially if their holding is a very large percentage of the network but only a very small percentage of their overall cryptocurrency holdings.
Ethereum is developing Casper, a system which will punish those who try to abuse their Proof of Stake network. If a participant validates a malicious block, it’s possible for them to lose their initial investment as punishment for acting against the network’s best interest. All those who wish to stake on Ethereum when it switches to Proof of Stake will be required to put up coins as collateral for this purpose as a security layer.
While the Proof of Stake consensus method does have some shortcomings that may need to be addressed in the near future, it does provide many benefits as well. Since massive amounts of hardware and electricity are not required for validation, it’s a much more efficient solution for both economical and ecological reasons. Often this results in faster and cheaper transactions as well.
- Users must stake their capital on the network to be validators.
- Rewards those who are more invested in a currency or project.
- Improves decentralization by offering a lower barrier to entry.
- Provides better scaling capabilities through being environmentally friendly.
Where do the miners come into play for Proof Of Stake?
Proof of Stake was first implemented by a cryptocurrency in 2012. Much like its older brother, Proof of Work, this algorithm also uses its miners to confirm transactions on the blockchain. However, it does do this a little bit differently. Typically, in a PoS coin, the specifics of your computer do not matter much or at all in contrast to PoW. In fact, in some instances, you can even participate on a Laptop or a mobile phone. Likewise, older computers also have no problem minting coins in a Proof of Stake set up either.
This is because the “hash power” of a Proof of Stake miner is not derived from the power of their graphics cards but from the weight of their investment. In order to participate in the network and to earn rewards PoS miners will need to stake their investment. Usually, this means that their coins must stay in their desktop wallets and be continually connected to the network. Doing so allows for them to confirm the transactions of others and to be rewarded for it much like a PoW miner would be.
Those participating in PoS networks will be awarded blocks based on their wallet weights. This number comes from a few factors. The first being the balance of coins held in the wallet. Having more coins is typically the easiest way to earn more frequent stakes, and it’s always to an investor’s advantage to have more coins in their staking wallet.
The second factor is time. Proof of Stake coins all have time to mature, and this must be met before any stakes occur at all. However, once they have matured these coins will continue to gain weight with the network. This means that even investors with only a handful of coins will eventually be able to stake as opposed to being beaten out by other miners with more coins at their disposal. The last number that factors into the equation is the network weight. A miner has no control over this number as it is in relation to the total number of other people staking on the network and their own specific wallet weights. While everyone will eventually stake regardless of their balance, it could take a very long time to do so if they do not have many coins.
There is some debate in this regard as to whether this makes Proof of Stake cryptocurrencies more or less centralized than their Proof of Work counterparts. On the one hand, anyone can begin staking and securing the network with little technical knowledge. This makes it easy to put more nodes online at any given time in more places around the world. On the other hand, those who got into a staking cryptocurrency first will no doubt have an advantage over other users as they had the ability to acquire many coins for a much smaller cost, and now they can mint even more coins by staking them. In this sense, it may be impossible for a newer investor to ever catch up to an early adopter. However, in a PoW model, it’s unlikely that a new miner would have the money or resources to compete with a larger operation either, so the answer to which is fairer is inconclusive.
Pros of Proof of Stake minting
- Requires little technical knowledge, making it easy for beginners to mint coins.
- Uses less electricity than PoW methods.
- Doesn’t require any expensive hardware, bringing mining to more devices.
- Easier to scale than PoW, and usually results in faster, cheaper transactions.
Cons of Proof of Stake minting
- Requires an upfront investment before you can begin mining.
- Some coins can require a lot of capital to stake efficiently.
- Still not quite as secure as PoW methods.
- Early adopters have a large advantage over new investors.
Which is better? PoW or PoS?
Not everything needs to be a one or the other decision. The best part about cryptocurrency is that it is a free market where many options are allowed to exist freely. That means that there are currencies for those that favor PoW and for those that favor PoS.
If you’re gamer or a hobbyist that enjoys building your own computers then you may be interested in mining using Proof of Work in your spare time. This road will require you to have a good deal of technical knowledge. You’ll need to be able to construct your own machines that have hardware that’s powerful enough to compete on your chosen network. You’ll also need to be able to properly configure the mining software. While there are some easier to use software packages out there, many of them still have no UI, and they function via command line and BAT files. You may need to spend some time learning about these before you can mine successfully. It is however entertaining, even if you don’t earn many coins from it. Also not that mining using PoW requires a great deal of electricity, so make sure you factor the cost before calculating your profits.
If you’d prefer to get started right away and you don’t mind spending a little money on some coins initially, then PoS might be more up your alley. This is especially true if you only have an older computer or laptop at your disposal because you’ll still be able to mint coins utilizing the Proof of Stake method, where you otherwise could not with Proof of Work.
Some PoW Cryptocurrencies
- Bitcoin (BTC)
- Ethereum (ETH)
- Litecoin (LTC)
- Monero (XMR)
- Dogecoin (DOGE)
- ZCash (ZEC)
Some PoS Cryptocurrencies
- Bitshares (BTS)
- Diamond (DMD)
- NAV Coin (NAV)
Cryptocurrencies that use both PoW and PoS
- BitcoinDark (BTCD)
In closing, while PoW and PoS are very different in their approach, they both are working to accomplish much the same goal. Which one is better has not yet been decided by the cryptocurrencies of the future, and in many cases, both may actually be used in a split algorithm method, which is actually quite common. No matter which method you think is the best, they are both fascinating, and it’s worth your time to spend an afternoon trying both of them out for yourself and learning first hand how the process for each works.