So the blockchain needs a way to validate transactions, create new blocks, and update the so-called public ledger. The primary way this is done is through Proof of Work(PoW), which was popularized with the emergence of Bitcoin, although it was around before that. Bitcoin’s PoW was originally invented as a measure against email spam. Newer cryptocurrencies such as Ethereum advocate for a different way of doing the same thing which is called Proof of Stake(PoS). At the end of the day, both are consensus mechanisms. So what is the difference between the two and which is better?
Proof of Work uses computing power to solve cryptographic equations or puzzles. This is often the job of a miner to do and takes a fee as a payment for his work.
A downside of PoW that is talked about a lot is that this way requires large amounts of energy for the sole purpose of mining. In the early days, you could mine Bitcoin with just a laptop. But with the increase of adoption and more people wanting to mine Bitcoin, the algorithms go more complex. This had, as a result, the increase of computational power needed to validate and add a block to the chain, ending up with mine farms doing just that.
Proof of Stake relies on holders of a cryptocurrency to lock up their coins to validate the transaction. They keep their coins at stake — hence the word staking — and receive a fee for doing so. If they validate a fraudulent transaction then a portion of their coins will be taken. This incentivizes the participants to play fair since they will lose more money than they would make if they tried to steal.
One weak point that is attributed to both of these consensus mechanisms is the 51% attack. When mining, miners often join a so-called mining pool. This increases one’s chances of solving these hash puzzles since there are more people sharing their computing power. The danger is that if a pool or any entity reaches more than 51% of the mining network they could theoretically take over and control the system and the legitimacy of the network as a whole.
This is a concern with both PoW and PoS but it’s rather unlikely as the network grows in size. This incentives the miners to act honestly since the reward from the block is more compelling.