What Are Proof Of Stake Or Proof Of Work Coins?

Jump to page contents

What Are Proof Of Stake Or Proof Of Work Coins?

Proof of Stake (PoS) and Proof of Work (PoW) govern the way that transactions are verified in a decentralised network, such as blockchain. PoS is the more recent of the two terms and became significantly important when the Ethereum blockchain announced that it will start using this as its main method of verification.

Proof of Work

PoW is a protocol designed to deter cyber-criminals and unauthorised access, such as the common DDoS attacks. This design protocol existed before Bitcoin, but it was deemed safe enough by the elusive cryptocurrency founder. In fact, it featured extensively in his original white paper as it is the basis of a decentralised, trustless network.

PoW is an important element in the mining process as it is used to define an intricate, and oftentimes expensive, computer calculation. Without mining, new blocks cannot be created or verified, and the entire blockchain infrastructure would collapse. Through mining, miners get rewarded in cryptocurrency, which they can then trade on exchanges or store in secure wallets.

Technically, mining is the reverse process of hashing, as it determines a number so the cryptographic hash algorithm of the data within the block results in lower than a given threshold. When a miner, or pool of miners, arrive at the correct solution, the entire network is informed and the miner receives the prize as proof of his/her/their work.

PoW works similarly across a variety of cryptocurrency blockchains, including Ethereum, however, the developers of this blockchain sought to introduce an alternative system of reward.

Proof of Stake

PoS transforms the consensus mechanism, turning it completely virtual. This system’s overall processes mirror those of PoW, with the main difference being the method of reaching the end goal. While in PoW miners solve cryptographic algorithms using computers, in PoS miners use validators.

These validators store some of the blockchain’s cryptocurrency, such as Ether, to use as a stake in the ecosystem. Then they bet on the blocks which they feel will follow on the chain. When they are correct, these receive a block reward which is proportionately divided according to their stake.

Validators are selected from a pool of forgers, who are users who express their interest to use PoS. After agreeing to a contract, forgers will be inducted and become validators. The reward received by each validator depends on the total number, therefore, the more validators the lower the reward and vice versa.

Why PoS?

The simple answer is energy. PoW processes require massive energy which is expensive and damaging to the environment. According to 2015 data, 1 Bitcoin transaction requires the same amount of electricity consumed by an American household in 1.57 days. Since this electricity is paid for using fiat currency, there is constant pressure to use Kraken and other exchanges to sell crypto. 

Another advantage is that while PoW miners could end up owning none of the crypto being mined, PoS forgers always end up owning the coins which are minted.

Recently Similar Guides

cex-promotion etoro-promotion

Latest Guides

Beginner,eToro,Margin Trading

eToro Fees Explained In Detail

eToro is an online trading platform which has gained popularity across the globe. Known for keeping up with the latest investment developments, eToro offers investors access to a wide range of instruments and markets. This guide will focus primarily on eToro’s fees, often considered to be some of the most advantageous in the industry. A […]

11 December, 2019
Beginner,Bitcoin,Hacker,Scam

A How-To Guide To Spotting A Bitcoin Scam

Bitcoin was created as an alternative to traditional payments, using a technology which eliminates the need for intermediaries. 10 years later, Satoshi Nakamoto’s vision looks significantly different from the original goal. Whilst you can buy goods and services with Bitcoin, the world’s first cryptocurrency is less a payment currency and more a speculative asset. As […]

10 December, 2019
Bitcoin,Intermediate,Trading

Bitcoin Revolution: The Good The Bad And The Ugly

For a few years now, stories of average individuals making a fortune from cryptocurrencies have been circling across the Internet and social media pages. Due to their high volatility, digital coins such as Bitcoin, Ethereum, and Litecoin are traded on thousands of exchanges and platforms, with billions of dollars worth bought and sold each day. […]

9 December, 2019
Bitcoin,Intermediate,Scam,Trading

What Is Bitcoin Code?

Within a short period of time Bitcoin has come to represent a significant investment with the potential for lucrative returns. Like forex and stock trading, cryptocurrencies are commonly traded on exchanges across the world, and there are communities of day traders and serial investors who turn a profit by speculating on this new currency. As […]

4 December, 2019
Blockchain,Cryptocurrency,Gaming,Payment Solution

Online Gambling and How it’s Changed Over The Years

For centuries, gambling was confined to brick and mortar casinos. However, today you can gamble online, thanks to great technological advancements. Online gambling, enables customers to play traditional casino games at leisure – whether it’s in the comfort of their own home or even when commuting to work on a bus or train – thanks […]

2 December, 2019
Beginner,Bitcoin,Cryptocurrency,Trading

3 Things to Know When Trading Bitcoin

Understandably, a lot of people find bitcoin trading complicated and confusing. Even though it’s been around for a decade, it can still be difficult to grasp the concept of cryptocurrencies. In its most basic form, Bitcoin is a form of digital currency that people can buy. Trading bitcoins means buying them and selling to other […]

27 November, 2019
Bitcoin,Scam,Trading

What’s A Bitcoin Loophole?

Ever since the creation of Bitcoin and its subsequent growth, individuals have been looking for ways to profit with cryptocurrencies. Dubbed the modern gold rush, there are certainly many different ways to turn a profit by investing in Bitcoin. Bitcoin Loophole presents itself as a successful way to get rich off the world’s first cryptocurrency. […]

26 November, 2019
Beginner,Bitcoin,Blockchain,Crypto Mining,transactions

How Long Does A Bitcoin Transaction Take?

Bitcoin was launched as a payment mechanism which competes directly with bank transfers. Its main advantage was that no financial intermediaries would be needed, so payments can be settled faster and at much lower costs. In theory, Satoshi Nakamoto‘s looked like a revolutionary idea, but in practice, it was not as successful as many had […]

24 November, 2019