Understanding the differences between Proof of Work and Proof of Stake
In the world of cryptocurrencies, there is a significant difference if the technology the coin is based on is using ‘Proof of Work’ (POW) or ‘Proof of Stake’ (POS).
Short History
Bitcoin is set on POW concept.
This method gives the participating miners, according to his computing capabilities, a reword on his effort to the hashing contribution.
This method in times creates different challenges we will cover soon.
A year after Bitcoin was introduced, a different method, mostly know as POW was introduced to overcome these issues.
Following in bullet points the differences between the methods.
Proof of work (POW)
- Miners compete among themselves by using processing power.
- Computers choose the best processing unit in order to perform mining. These days, the computing units go for Giga hashes and even Tera hashes per second before a processing unit is chosen to perform the mining. It takes a lot of electricity and processing power to perform.
- Mining consumes a huge amount of electricity.
- As miners grow in numbers, and due to the reason above, the mining process consumes a huge amount of electricity.
- Most people have no access/understanding to mining and equipment.
- Today, with advanced methods of mining, most people can’t afford mining rigs. Today, miners gathered in pools in order to have the chance to mine bitcoin. These pools reduce the variance of mining possibility. So, if one miner finds a block, every miner in his pool shares the reward.
- Miner’s pool formation in order to mine bitcoin.
- These pools are bound to be created as the variance to mine bitcoin today is just too high. One of the largest pool today is Gigahash.io. When a pool this large is created a question regarding the safety of the coin and decentralization is questionable.
- Due to Economies of scale huge pools of miners were created.
- The ever-growing demand for bitcoin hashing comes the big amount of miners that would like to get rewarded for mining. The chances to be picked for hashing has become scarce, which results in the miners to gather up together to a pool. Then when a miner gains thaccessibilityty to mine, all of his pool miners will get reworeded.
- Mining pools create power centralization.
- Interesting to see from the economic point of view, where the sum of miners grew, the mining became more difficult and hence pools of mining where created. The reward has decreased over time but the mining efforts have significantly increased.
- Security might be at stake.
- Where a pool of significant magnitude have the potential to fall than the consequences are clear to have results over a big amount of users.
Proof of Stake (POS)
the creation of coins by coins you already have rather than by hashing procedures– minting.
- Minters compete by using their coins.
- You can find several coins that you can use in order to use your hard drive power. One of the is Peercoin. Minters will compete by using their Peercoinsratherr than their computing power.
- Anyone can use his computer to mine.
- By using the coins you already have stored on your computer you can generate more coins. The reword on using Peercoin for example is 1% per year.
- Minting consumes less electricity power than mining.
- You can run the minting process in the background while your computer works on a diffrernt process. All that consumes significantly less power than competing on intricate mathematical puzzles (hashing).
- Solo minting can be uses and no need for pool miners.
- Since the accessibility of minting is easier, the formation of pools is not needed.
- Economies of scale do no lead to larger pools.
- Since the process of minting is accessible and the reword relatively small, there are no economies of scale and large pools are less likely to form.
- Decentralization increases over time.
- If users or so-called minters will keep using POS coins, and there will be less big pools of miners than decentralization is likely to increase.