Cryptocurrencies are starting to become a more mainstream topic. In this article we’re going to look at the two main types of blockchain validation, proof-of-work and proof-of-stake. What are they? How do they work? What are their advantages?
What is a blockchain?
First of all, it’s important to understand what a blockchain is. Put simply, a blockchain is a type of database that has a unique way of storing information. When new information is added to the database, it is put inside a ‘block.’ When this block is full, it is connected onto the end of all of the previous blocks, creating a chain. A new block is then created and the process repeats.
Cryptocurrencies utilise blockchains to send and verify transactions. When a new transaction is created, it is added to the current block before being verified by a network of validators. The size of these blocks can vary between different types of cryptocurrencies, and can affect the time for transactions to be verified. Once a transaction is verified, it has been confirmed by the network. To give you an idea of how long these times are, Bitcoin confirmation times are roughly 10 minutes. This means it will take around 10 minutes for a transfer to complete. Some exchanges and services can require up to 4 confirmations before your funds are available.
Currently, the most common validation method is through proof-of-work (PoW). With PoW, miners are constantly competing to solve complex mathematical problems for the chance to create the next block. These problems are extremely time consuming and require a large amount of computing power to solve. Therefore, if a miner has been chosen to create a block, they must have used a lot of computational effort, hence the name: proof of work.
When a miner has successfully solved a problem, a code (called a hash) is assigned to the block of transactions and the miner receives a block reward. Miners with more computational power will be able to solve more of these mathematical problems at a faster rate and will receive the most rewards.
Examples of cryptocurrencies that currently use PoW validation are Bitcoin, Bitcoin Cash, Ethereum and Litecoin.
After PoW, the second most common form of blockchain validation is proof-of-stake (PoS). With PoS, there are no miners competing to create new blocks. Instead, the creator of a new block is chosen randomly based on the amount of the cryptocurrency that they have ‘locked up’ or staked.
No block rewards are given with PoS, but instead, the creator of a new block is awarded part of the transaction fee. Users that have the largest amount of cryptocurrency staked will be more likely to be chosen to create the next block, i.e., probability of being chosen to create a new block is directly proportional to the amount the user has staked on the network. Users with the highest amount staked will receive the most rewards.
Examples of cryptocurrencies that currently use PoS validation are Tezos, Cosmos and Algorand.
Overtime, the underlying features of cryptocurrencies can be upgraded or changed to help meet different needs and expectations. Soon, the second largest cryptocurrency by market cap, Ethereum ($207 billion at the time of writing) will be undergoing an upgrade to Ethereum 2.0. One of the many upcoming changes is that the cryptocurrency will be moving to a proof-of-stake validation system. There are plenty of other significant changes coming as part of this upgrade, but in this article, we will focus on the change of blockchain validation method.
Why Change to PoS?
One of the major downsides of using PoW, due to the extremely large amount of computing power required, is that there is a very sizable need for electricity. This means that PoW blockchains directly have a negative impact on the environment.
Another downside comes from the reliability of the networks. If a blockchain solely relies on miners using their computing power, then what happens if they were to switch that computing power off? Meanwhile, PoS blockchains incentivise people to keep their crypto staked for long periods of time, so that they can benefit from the compounding of their staking rewards.
PoW blockchains are generally slow at confirming transactions as the mathematical problems take time to solve. With PoS, there are no mathematical problems to answer, therefore, transactions can occur much quicker. For example, transactions of Algorand can happen near instantly (around 5 seconds).
Cryptocurrencies that use PoW rely on a network of miners to maintain the blockchain and also have damaging effects on the environment. In the future, I think it will be more common to see blockchains operating with PoS as they are more environmentally friendly and come with the added benefit of receiving rewards just for staking. I think they could appeal greatly to more investors if the volatility in prices begins to decrease. Let us know what you think by leaving a comment below!