Blockchain is now responsible for processing millions of crypto transactions each day, according to work from Statista. However, different coins process transactions differently. For example, Bitcoin processes transactions differ from Cardano or Solana. That’s because different blockchain networks use different consensus mechanisms.
Proof of Stake and Proof of Work are the two most popular consensus mechanisms. Each has a unique process to determine how validators agree on whether crypto transactions are valid or invalid.
Our guide compares Proof of Stake vs Proof of Work to help you learn more about how these validation methods work.
Why Is Blockchain Consensus Necessary?
Before we dive into the differences between Proof of Stake vs. Proof of Work, it’s essential to understand why we need these two consensus mechanisms.
In short, blockchain consensus helps protect the integrity of crypto transactions. Blockchain consensus is the digital equivalent of banknote counterfeiting protection. Bitcoin, and other blockchains, use blockchain consensus mechanisms to solve the double-spending problem.
Generally, blockchain consensus requires a simple majority (> 50%) of validators agree that a crypto transaction is valid before it’s added to the blockchain. If consensus isn’t reached, a user can’t send funds on the blockchain.
Validators ensure the circulating supply of a cryptocurrency is the same as the intended circulating supply. They’re responsible for verifying transactions and ensuring no one can spend the same funds twice.
For example, less than 19 million BTC in circulation as of March 2022. Without blockchain consensus, anyone could mint new BTC out of thin air. With proper blockchain consensus, validators can only mint new BTC by securing the network and validating authentic transactions.
What is Proof of Work?
Proof of Work (PoW) is a type of blockchain consensus mechanism that requires large amounts of computing power to solve complex mathematical problems to validate crypto transactions.
Bitcoin has the highest market cap of any PoW cryptocurrency. Dogecoin (DOGE) and Litecoin (LTC) are examples of other cryptocurrencies that use Proof of Work.
How It Works
PoW Validators, known as cryptocurrency miners, use specialized computer hardware to mine (validate) transactions. Miners are essentially competing against each other in a race to solve each new mathematical puzzle.
After a miner solves a puzzle, the network confirms the transaction. The miner who validates the transaction receives a block reward paid out in the blockchain’s native cryptocurrency. For example, a crypto miner who validates a transaction on the Bitcoin blockchain receives BTC as a reward, Dogecoin miners receive DOGE, and so on.
Each blockchain has its block rewards. For example, in 2022 the block reward for Bitcoin is 6.25 BTC, while Dogecoin is 10,000 DOGE.
Bitcoin Mining: Are Environmental Concerns Valid?
When we think about Proof of Work, Bitcoin mining is the first thing that comes to mind.
As of early 2022, Bitcoin mining consumes around 91 terawatt-hours of electricity annually, according to Business Insider. This equates to more annual electricity consumption than Finland a country with a population of 5.5 million people.
Since Bitcoin first launched in January 2009, its energy consumption has increased as more miners enter the market, which has led to many concerns about the future sustainability of PoW mining.
It’s important to note that cryptocurrency mining isn’t completely detrimental to the environment. Many miners use renewable energy sources, such as wind and solar, to run mining operations.
Attempts to ban Proof of Work mining have been unsuccessful in the EU, and nations like El Salvador have favorable policies towards PoW crypto mining.
What is Proof of Stake?
Proof of Stake (PoS) is a type of blockchain consensus mechanism that allows users to stake (deposit) funds and verify crypto transactions.
Cardano (ADA), Solana (SOL), and Avalanche (AVAX) are examples of cryptocurrencies that currently use Proof of Stake.
Ethereum (ETH) is in the process of a multi-year migration from PoW to PoS, known as Ethereum 2.0. Once this transition is complete, ETH will be the highest-ranking cryptocurrency by market cap that uses Proof of Stake.
How It Works
Proof of Stake allows anyone who holds cryptocurrency to participate in the transaction validation process. For example, a user who holds ADA can stake funds to become a validator responsible for verifying transactions. Users then receive block rewards.
Proof of Stake commonly uses slashing to ensure that validators only validate authentic transactions. Slashing is when validators lose a portion of their staked funds if they try to validate transactions that other participants on the network deem to be invalid.
Each blockchain network sets its staking requirements. For example, to become a validator on Ethereum 2.0, you need to run a full node and stake at least 32 ETH. However, for Ethereum 2.0 and other PoS networks, you can use staking pools to generate yield even if you don’t meet the requirements to become a validator.
Sites like stakingrewards.com provide real-time data about how much yield stakers can generate for different cryptocurrencies.
Is Proof of Stake the Future of Crypto?
Proof of Stake is trying to solve many shortcomings related to Proof of Work. One of the significant advantages PoS offers is its energy efficiency. While PoW requires massive energy, PoS uses a tiny fraction to validate transactions.
Scalability is another major advantage of PoS. For the most part, PoW blockchains can’t efficiently process a large number of transactions at any given point in time. For example, Ethereum gas fees (network fees that go to validators) have been over $100 for certain decentralized finance (DeFi) transactions with PoW crypto mining. In contrast, other blockchains that use PoS cost only a few cents for similar transactions.
Proof of Stake vs Proof of Work: How Are They Different?
Now that we understand the fundamentals of Proof of Stake vs Proof of Work, let’s examine how they compare across five key categories.
|Category||Proof of Work||Proof of Stake|
|Accessibility||Only users with specialized computer hardware can validate transactions and generate block rewards.||Any user who has a digital wallet can stake (lock) crypto to validate transactions and generate block rewards.|
|Energy Efficiency||Requires a lot of energy to maintain blockchain consensus and becomes more inefficient as more miners compete for block rewards.||Requires a very low amount of energy to validate transactions. Ethereum with PoS is estimated to become 99.95% more energy efficient.|
|Transaction Scalability||Lower scalability. For example, Bitcoin only processes around seven transactions per second, while Dogecoin only processes around 33 transactions per second.||Higher scalability. For example, Polkadot currently processes 1,500 transactions per second, and Avalanche processes an infinite number of transactions per second.|
|Operating Costs||Average mining rig costs thousands of dollars. Plus, miners need to pay electricity costs to run mining rigs.||It doesn’t cost anything for an ordinary user to start generating block rewards.|
|Security||Networks with more decentralization and higher costs to validate transactions are highly secure. More centralized, smaller PoW blockchains are less secure from threats such as 51% attacks, making double-spending possible.||Have a few known attack vectors, but mainly theoretical problems. For example, Ethereum researchers cite issues such as short-range reorganizations and adversarial network delays as possible threats.|
Trade PoS and PoW Cryptocurrencies on Abra
Abra is a cryptocurrency wealth management platform where you can trade and borrow crypto. Our trading platform supports 75+ cryptocurrencies!
Download the app today to start trading your favorite PoS and PoW coins.Download App
Established in 2014, Abra is on a mission to create a simple and honest platform that enables millions of cryptocurrency holders to maximize the potential of their assets. Abra enables both individuals and businesses to safely and securely buy, trade, and borrow against cryptocurrencies – all in one place. Abra’s vision is an open, global financial system that is easily accessible to everyone.
Based in the United States, Abra is available in over 150 countries and makes it easy to convert between crypto and a wide variety of local fiat currencies. With over 2MM customers, $7B in transactions processed, and $1.5B in assets under management, Abra continues to grow rapidly. Abra is widely loved and trusted – in April 2022, pymnts.com reviewed and rated Abra amongst the top 5 most popular crypto wallets in the market. Abra is backed by top-tier investors such as American Express Ventures and First Round Capital.
How Abra Protects Your Funds
Abra places clients’ financial objectives and security first. Abra practices a culture of risk management across all levels and functions within the organization.
Abra employs a state-of-the-art enterprise risk management framework that comprises a comprehensive set of policies, procedures, and practices detailing all applicable risk-related objectives and constraints for the entirety of the business. Abra has instituted a complete set of requisite systems and controls that continuously enforce these policies, procedures, and practices to manage all operations, including credit and lending. Abra’s independent Risk Committee comprises experienced compliance, risk, securities, and fraud operations professionals with backgrounds in industries ranging from traditional and digital assets banking, payments, remittance, to fintech.
Please visit our FAQ to learn more.