Decentralized cryptocurrency networks must ensure that no one spends the same money twice without a central authority like Visa or PayPal in the middle. To do this, the networks use something called a “consensus mechanism,” which is a system that allows all computers on a cryptographic network to agree on which transactions are legitimate. Proof-of-work and proof-of-stake are two blockchain consensus models used to ensure the validity of transactions in cryptocurrency transactions. Since blockchains lack any centralized governing authority, proof of stake is a method of guaranteeing the validity of data stored on the network. Using this system, cryptocurrency owners can share their coins, which gives them the right to check new blocks of transactions and add them to the blockchain. With proof-of-stake, participants, called “validators,” lock up specific amounts of cryptocurrencies or crypto-tokens—for example, locking up their stake in a smart contract on the blockchain. In return, they have a chance to validate new transactions and earn rewards. But if they improperly confirm bad or fake data, they may lose some or all of their shares as a penalty.
What is proof of work?
With the proof of work (POW) model, cryptocurrency miners compete against each other to solve complex problems using high-powered computers. Those first to do so are given the authority to add the new block of transactions and then rewarded with digital currency for their work. When a block is authenticated, it’s added to the blockchain. Proof of work requires increasingly fast computers, the use of significant energy resources, and processes that eventually slow down transaction times as a cryptocurrency network grows.
What are differences between proof of work and proof of stake?
Energy consumption is one of the major differences between these two consensus mechanisms. Because proof-of-stake blockchains don’t require miners to spend electricity on repetitive processes (competing to solve the same puzzle), proof-of-stake allows networks to operate with far fewer resources. Both consensus mechanisms have economic consequences that penalize network disruptions and neutralize malicious actors. In proof-of-work, the penalty for miners who submit invalid data or blocks is reduced costs of computing power, energy, and time. In proof of stake, the validators’ staked crypto funds serve as an economic incentive to act in the network’s best interests. In the case that a validator accepts a bad block, a portion of their staked funds will be “slashed” as a penalty. The amount that a validator can be slashed depends on the network.
Which Cryptocurrencies Use Proof of Stake?
Proof of Stake is becoming more common as a consensus mechanism in the cryptocurrency world. There are currently around 80 different cryptocurrencies that use PoS as a consensus mechanism. Some of the most popular coins using Proof of Stake are:
- Cardano (ADA)
- Tron (TRX)
- EOS (EOS)
- Cosmos (ATOM)
- Tezos (XTC)