Proof-of-stake vs. proof-of-work: Differences explained

Though Bitcoin’s (BTC) transaction history is securely sequenced using proof-of-work (PoW), it consumes a lot of electricity and the number of transactions it can handle at once is limited. As a result, new consensus mechanisms focusing on the less energy-intensive method have emerged, with the proof-of-stake (PoS) model being one of the most prominent. These consensus mechanisms enable computer networks to collaborate while remaining secure.

Blockchain networks need to resolve several issues in order to function effectively. For instance, without a central authority like banks or FinTechs (e.g.PayPal) in the middle, decentralized cryptocurrency networks must ensure that no party in a network spends the same money multiple times. Furthermore, the consensus mechanism prevents the network from being derailed through a hard fork.

However, in a centralized organization like a bank, the board of decision-makers or regulators control such activities. Whereas crypto is based on a community, so the blockchain must reach a consensus to verify the transactions and blocks.

Proof-of-work and proof-of-stake are the two main consensus mechanisms presently used by decentralized finance (DeFi) projects to cryptographically obtain consensus on cryptocurrency networks. When Satoshi Nakamoto was creating Bitcoin (the first cryptocurrency), they needed to figure out a means to verify transactions without the involvement of a third party. To achieve this, they employed a consensus mechanism called proof-of-work to allow networks to agree on which transactions are valid.

On the contrary, proof-of-stake (PoS) is a modern consensus method that powers newer DeFi projects and cryptocurrencies. Some projects begin with PoS right away or are transitioning to PoS from PoW. However, building a PoS consensus network right away is a significant technological issue, and it is not as simple as using PoW to gain network consensus.