Decentralization is a distinguishing feature of most popular cryptocurrencies. However, the lack of a central authority in charge of transaction verification poses a problem: the network must validate transaction data to ensure that all information is correct and accurate.
This determination is where the concepts of Proof-of-work and Proof-of-stake come into play.
Proof-of-work and proof-of-stake are consensus mechanisms that allow blockchains to function securely. So that only authentic users can contribute new transactions to the blockchain, these consensus processes get used.
Proof-of-work is a system in which computers compete to be the first to solve complex puzzles.
Because the energy and resources required to finish the puzzle are often considered the digital counterpart of the real-world process of mining valuable metals from the earth, the process gets referred to as mining.
Miners are authorized to generate a new block — a grouping of transactions — if they successfully solve the "puzzle" ahead of other miners. Then, the network of nodes will independently audit the existing ledger and this new block. If everything checks out, the new block is "chained" to the preceding block, producing a chronological transaction chain. The miner is paid in Bitcoins to compensate for providing their resources.
Proof-of-stake minimizes the amount of computing labor required to authenticate blocks and transactions that ensure the security of the blockchain and, consequently, a cryptocurrency.
Proof-of-stake alters coin owners' machines to change the way blocks are added. The owners submit their coins as collateral in exchange for the ability to validate blocks and hence, be called "validators."
The block is then "mined," or validated, by validators chosen at random. Instead of using a competition-based mechanism like Proof-of-work, this mechanism randomizes who gets to "mine."
Many validators validate blocks, and when a certain number of validators confirm that the block is correct, it is finalized and closed.
A Breakdown of Proof-of-Stake vs. Proof-of-Work
The most notable advantage of Proof-of-work is security and dependability. Because of the complexity of the mathematical equations required for verification, manipulating the system is practically impossible. The main downsides of Proof-of-work are its high energy consumption and slow speeds.
Proof-of-stake, on the other hand, eliminates the need for complicated computations. So, in terms of energy efficiency, it outperforms Proof-of-work. Instead, those with most of the network's native currencies have the authority to validate transactions.
The premise is that people who have a large stake in the system are less inclined to influence it. And if they do, their stake could be obliterated.
When it comes to speed, Proof-of-stake outperforms Proof-of-work as well. For example, Ethereum, a Proof-of-work blockchain, can only execute 30 transactions per second at the most. Once the network has migrated to Proof-of-stake and has launched its shard chains, it hopes to be able to handle up to 100,000 transactions per second at peak times.
When it comes to security and decentralization, Proof-of-work still gets deemed superior. On the other hand, the Proof-of-stake is the winner when it comes to speed. There is not a single consensus mechanism that is superior to the others on all fronts in every situation.
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