Proof of stake vs. proof of work: key differences between these methods of verifying cryptocurrency transactions

• Proof of work and proof of stake are the two main ways cryptocurrency transactions are verified.
• Proof of stake requires participants to put cryptocurrency as collateral for the opportunity to successfully approve transactions.
• Proof of work is more secure than proof of stake, but it’s slower and consumes more energy.

(401 G.C. Quciknote Wed. April 27th, 2022, from INSIDER Dec. 2021) – A defining characteristic of most of the largest cryptocurrencies is that they are decentralized. Proponents point to this as one of their main benefits. But the lack of a central authority responsible for verifying transactions also presents a challenge.

Bitcoin overcomes it by using an approach known as proof of work, as do several other major cryptocurrencies including Ethereum, Bitcoin Cash, and Litecoin. However, a growing number of platforms such as Solana, Avalanche, and Cardano, are now using an alternative known as proof of stake, which consumes much less energy.

Proof of stake vs. proof of work: at a glance

Proof of work and proof of stake are similar in that they’re both mechanisms through which a distributed network of participants can agree on which new block of transactions is added to a cryptocurrency’s digital ledger, known as a blockchain. But they differ in how they reach this endpoint.

For its part, proof of work enables agreement on which block to add by requiring network participants to expend large amounts of computational resources and energy on generating new valid blocks. Proof of stake requires network participants to stake cryptocurrency as collateral in favor of the new block they believe should be added to the chain.

What is proof of stake?

Proof of stake revolves around a process known as staking. This is a bit like voting, although with most proof-of-stake cryptocurrencies the process doesn’t involve “one person one vote.” Instead, participants — known as validators — stake a certain amount of crypto behind the block they want added to the chain, with different blockchains setting different limits for this amount.

“In proof of stake the cryptocurrency holders ‘vote’ to approve legitimate transactions. As a reward for voting on legitimate transactions, ‘stakers’ are paid in newly created cryptocurrency over time,” says Garrick Hileman, the head of research at Blockchain.com.

One primary advantage of proof of stake is that it avoids the need to invest increasing sums of money in ever-more powerful computing equipment that consume growing amounts of electricity.

Proof of stake was developed “in response to the high computational costs of proof of work protocols,” says Catherine Mulligan, a professor of computer science at the University of Lisbon’s Instituto Superior Técnico.

Proof of stake also promises greater scalability and throughput than proof of work, since transactions and blocks can be approved more quickly, without the need for complex equations to be solved.

“Two major benefits of proof of stake over proof of work are that PoS can be less energy intensive and have greater transaction throughput (speed) and capacity,” says Hileman.

However, proof of stake can tend toward centralization. This is because, in certain proof-of-stake cryptocurrencies, there isn’t really any limit on how much crypto a single validator could stake.

“A key disadvantage is that in some systems, you are only selecting validators that have the most money. This means that proof of stake is likely to be significantly less democratic in many cases than Bitcoin,” says Mulligan.

Another problem with proof of stake is that, while its environmental credentials are more impressive because it uses less energy, the approach hasn’t really been proven on the scale that proof-of-work platforms have.