By Luke Conway/February 18, 2022, 2:25 pm EST
Proof-of-work and proof-of-stake are consensus mechanisms, or algorithms, that allow blockchains to operate securely. These consensus mechanisms keep blockchains secure by allowing only genuine users to add new transactions.
They work by making potential participants prove they have dedicated some resource, like money or energy, to the blockchain. This feature helps filter out those who may not be genuine or committed to the network. The main difference between proof-of-work and proof-of-stake is how they choose who can add transactions to the chain.
Quick facts:
- Proof-of-work and proof-of-stake are algorithms, also known as consensus mechanisms, that help blockchains synchronize data and remain secure.
- These algorithms determine which node (computer) in the network can add the next block of transactions to the chain.
- Both mechanisms have proven to be successful at maintaining blockchains, though they each have trade-offs.
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What is proof-of-work?
Proof-of-work is a system where computers compete against each other to be the first to solve complex puzzles.
This process is commonly referred to as mining because the energy and resources required to complete the puzzle are often considered the digital equivalent to the real-world process of mining precious metals from the earth.
Nathaniel Popper’s book “Digital Gold” uses an analogy to describe proof-of-work in the Bitcoin system:
“It is relatively easy to multiply 2,903 and 3,571 using a piece of paper and pencil, but much, much harder to figure out what two numbers can be multiplied together to get 10,366,613.”
Using this analogy, we can imagine that a miner in Bitcoin’s network must figure out which two numbers can be multiplied to reach 10,366,613 by guessing combinations of numbers until it hits the correct answer. Once a computer determines that 2,903 can be multiplied with 3,571 to make 10,366,613, the computer presents the solution to the other computers in the network, which can easily verify that 2,903 and 3,571 do, in fact, equal 10,366,613 when multiplied.
When a miner solves this “puzzle” before other miners, they are allowed to create a new block (a grouping of transactions) and broadcast it to the network of nodes, which will then individually perform audits of the existing ledger and the new block. Should everything check out, the new block is “chained” onto the previous block, creating a chronological chain of transactions. The miner is then rewarded with bitcoins for supplying their resources (energy).
Proof-of-work, mining and security
Mining requires a great deal of electricity and secures the network by ensuring that only those that can prove they have expended resources are granted the right to append a new set of transactions to the blockchain.
Because of this feature, it is difficult, time-consuming and expensive to attack a proof-of-work system like Bitcoin’s. Attackers would need to purchase and set up mining equipment and pay for the electricity to run the equipment. They would then compete to solve the puzzle and attempt to add a block of transactions containing counterfeit bitcoins to the chain.
Should the nefarious miner successfully solve the puzzle first, they would try to broadcast a new block of transactions out to the rest of the network. The network’s nodes would then perform an audit to determine the legitimacy of the block and the transactions within it.
As the nodes audit the new block against the previous version of the ledger, they would notice the counterfeit bitcoins. The block would be considered invalid based on consensus rules.
Proof-of-work makes it impossible to counterfeit bitcoin unless a nefarious miner controls more than 50% of the entire network — this means they must control at least 51% of both the cumulative computing power of miners, known as the hashrate, and the nodes in the network. If they did control more than half of the network, the bad actor could broadcast a bad block to the network and have their nodes accept the block to the chain.
Given how large Bitcoin’s network has grown and how much energy miners contribute to the proof-of-work system, such an attack would be nearly impossible today.
If a government, company or other entity were to gather enough resources to successfully make up more than 50% of the network with the intention of attacking it, the network’s genuine participants would likely create a new branch of the chain, also known as a fork, rendering the previous chain and the attack against it useless.
What is proof-of-stake?
In the proof-of-stake system, validators (the proof-of-stake equivalent of miners) are chosen to find a block based on the number of tokens they hold rather than having an arbitrary competition between miners determine which node can add a block.
In this system, the “stake” amount, or quantity of crypto a user holds, replaces the work miners do in proof-of-work. This staking structure secures the network because a potential participant must purchase the cryptocurrency and hold it to be chosen to form a block and earn rewards.
Participants are required to spend money and dedicate financial resources to the network, similar to how miners must expend electricity in a proof-of-work system. Those who have spent money on coins to earn these rewards have a vested interest in the network’s continued success.
Proof-of-stake prevents attacks and counterfeit coins with essentially the same mechanism as proof-of-work. Instead of controlling 51% of the mining hashrate and nodes, like with proof-of-work, attackers of a proof-of-stake system would need to hold at least 51% of the coin’s supply and control at least 51% of the network’s nodes.
Pros and cons of proof-of-work and proof-of-stake
