What is Proof/Consensus Mechanism? Difference between PoW & PoS?

For a decentralized blockchain which has no regulatory authority or oversight committee, proper functioning of the network requires a validation trust mechanism which is resolved by the concept of proof. The mechanism in which proof is obtained in the blockchain network defines how the transaction data is validated and this can happen via multiple proof concepts such as proof of work, proof of stake, proof of concept, proof of activity, proof of location, proof of elapsed time, proof of importance, proof of authority and many more.

Thus, the concept of proof is the essential foundation building block for any blockchain network. While there are many concepts based on which proof mechanism could be built for a blockchain to function, two of the most commonly used proof mechanism in today’s blockchain ecosystem are proof of work and proof of stake. Proof of Work (Pow) and Proof of Stake (PoS) are the two most commonly found consensus mechanisms in today’s broader blockchain ecosystem.

What is Proof of Work?

The Proof of Work consensus algorithm is the foundational building block of most traditional blockchain networks such as Bitcoin, Ethereum, Litecoin, Monero and Bitcoin cash. This is a mechanism which purely relies on computational capabilities to validate transactions. Numerous nodes work at the same time to confirm a transaction, But, to add a block to the network a miner (computational unit) must prove that he has completed a certain task which involves solving certain equations to find a hash with corresponding rules.

This task is highly precise and hence requires huge computational capabilities which results in huge energy expenditure requirements. The more computational power a user/entity holds, the more powerful they are in this mechanism. But it is highly robust as computational requirements go higher with increasing transactions and the total time a blockchain network has been active for making transaction records stored in the network highly immutable. A participant doesn’t need anyone’s permission to join in this peer to peer based blockchain ecosystem as the reward is generated based on computational activities completed.

The advantages of this consensus mechanism are:

  • Helps prevent double spending
  • It is highly secure owing to a higher requirement of computational power than the overall average if a person or entity wishes to make changes to any data in the network. Given high energy expenditure, the cost involved and the reward ratio it becomes a thankless and expensive task to try and forge the data here making it nearly forgery-proof to store transaction records.
  • Despite the cost involved various individuals and entities are still enticed into joining the ecosystem as value of the mined asset (cryptocurrency) grows higher the older the network becomes. Older networks require a higher hash rate to generate new tokens making the availability of total tokens in circulation limited thereby increasing its value.

The Disadvantages of this consensus mechanism are:

  • High energy consumption leads to higher costs
  • Again increased expenditure to maintain computational units (CPUs & GPUs)
  • An Older blockchain becomes, the higher the transaction management cost.

What is Proof of Stake?

This is a consensus mechanism designed with aim to negate certain flaws of the Proof of Work concept such as higher energy consumption and cost expenditure. In this algorithm, control over the validation of transaction records in the network is given to the owners of tokens of the network. The higher the percentage of tokens a user/entity holds, the greater their power to validate.

Here, a user becomes a validator by pledging a part of his token holdings or his entire token collection towards the betterment of the blockchain network. The validator is then rewarded a fixed percentage of the pledged assets as a reward for his validation work once a new block is added to the network. The higher your ownership of a token, the more a user/entity can pledge to gain proportional validation prowess.

The Advantages of this consensus method are:

  • Lower energy consumption
  • Lower cost expenditure to sustain and operate the blockchain
  • Transactions are faster and relatively inexpensive

The Disadvantages of this consensus method are:

  • Easier to take control over a network with higher token holdings resulting in a more centralised environment rather than true decentralisation
  • A Group of users/entities with significant holdings can band together to create new governing principles or make it easier to forge stored data
  • Higher possibility of making double-spending owing to the influence of centralised nature.

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