To know about Proof of Work and Proof of Stake, we should first know about blockchain and the working mechanism of the technology. Blockchain is an append-only ledger meaning that the data can only be uploaded but can’t be erased or removed. A blockchain is like a decentralized server supported by distributed nodes, where transactions are stored in a public ledger. A set of transactions are bundled together to form a block. The first block in a blockchain is called the genesis block. New blocks are created at specific intervals and are consecutively added to the end of the chain. Nodes validate the authenticity of new blocks through a consensus mechanism.
What Is Consensus Mechanism?
The consensus mechanism acts as a solid foundation supporting a blockchain network. In simpler words, the consensus is reaching an agreement among all of the nodes in the network, to approve the newly created block. Using this mechanism, every transaction and block is verified before being added to the end of the chain.
“Proof of Work” and “Proof of Stake” are the two major consensus mechanisms that are widely used by cryptocurrencies to verify new transactions. Bitcoin, the first cryptocurrency uses the Proof of Work consensus mechanism. Consensus helps to prevent double-spending in which the same coin is spent twice. They also help us in eliminating the need for a third party and thus maintain decentralization.
Proof of Work:
Proof of work in cryptocurrency is a consensus algorithm first published in 1993. Later, it was implemented by Satoshi Nakamoto in 2008 in Bitcoin. In this consensus mechanism, the ones that intend to create a new block are called the ‘Miners.’ Miners are responsible for adding a new block to the chain.
Proof of work makes use of the advanced form of ‘Cryptography.’ Cryptography uses complicated mathematical equations which can be solved only by powerful computers aka miners. Whenever a block is created, a new cryptographic equation is generated and is needed to be solved by the miners, to add the block to the chain. The miner that solves this puzzle is rewarded with cryptocurrencies.
- Since every transaction is verified, it adds trust, accuracy and reliability to the transactions.
- Proof of Work coins requires setting up many full nodes to prevent 51% of attacks.
- The energy consumption of this mechanism is considered to be directly proportional to the number of full nodes, (i.e) the energy consumption gets higher along with the usage of the network. Many debates are saying that bitcoin exhausts a high amount of energy to run the network.
- The mathematical equation gets more complex with time and usage, resulting in consuming more energy and reducing the transaction speed.
- The capital investment is quite high since the hardware required for setting up a full node is not cheap. To overcome these limitations, the Proof of Stake consensus mechanism was introduced.
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