Between all the terms constantly thrown around in the cryptocurrency world, it’s difficult for newcomers to keep up. We talk about different coins, tokens, and everything in between. However, we don’t always talk about the consensus protocols used in blockchain technology. Today, we’re fixing that. Let’s take a look at two of the most popular methods in a simple, easy-to-understand format. We’re looking at proof of work and proof of stake in an “explain to me like I’m 5” setting.
Consensus: What is It?
As the name implies, “consensus” is a way that everyone in the network reaches agreement. It’s important that we reach agreement on what is, or is not, added to the public ledger because that’s how we keep track of transactions.
If everyone has the option to randomly add, subtract, or alter transactions on the ledger, then we won’t have a very accurate account of everything. Remember that the public ledger with blockchain technology is essentially a large record that everyone’s contributing to. It’s important that we keep things correct and in order, or else we’ll be in one big mess! But how do we do that?
There is more than one way to reach consensus within a blockchain. In fact, this is one of the most talked about topics in the crypto community right now. Different ways of reaching consensus are called “consensus mechanisms,” and there are some differing opinions on which work best.
Right now, there are two big ones: proof of work (PoW) and proof of stake (PoS). Proof of stake (PoS) is getting a lot more attention nowadays with the possibility of the Ethereum blockchain moving over to it. Because of that, proof of stake (PoS) is definitely something all crypto-enthusiasts should be aware of. Let’s take a look at both so we can understand how the two function in a simple, easy-to-understand way.
Proof of Work (PoW)
Proof of work (PoW) is the first consensus mechanism many are familiar with. This is the original consensus model used for the Bitcoin network and is what still thrives in the industry. For the time being, the Ethereum network is also running on a proof of work model.
Proof of work (PoW) is why we see miners in the industry. In order to reach consensus on blocks, a lot of “work” has to be done. As the name implies, there is a lot work involved. The so-called “miners” are actually just computers running through a large set of cryptographic puzzles to effectively “mine” bitcoin. Those “mining” a block are actually just looking to solve the cryptographic puzzle in order to add it to the chain (making a “blockchain”).
As you might imagine, this requires an enormous amount of energy consumption and computational power. This is why big machines (the “miners”) are constantly running and solving problems to “mine” a block before others. Since there are block rewards for those who “mine” it, miners have an incentive to work harder. After a miner has “found” a block, it needs to be verified through the network and the miners get their bitcoins (BTC) as a reward.
The important takeaways from proof of work (PoW) is that it’s, well, a lot of work. Because of that work, and energy consumption, it’s not necessarily the most efficient process. But is there another way to do things?
Proof of Stake (PoS)
In case it wasn’t obvious enough: yes, some in the crypto community think there is a better way to do things. That’s where proof of stake (PoS) comes into play. Unlike PoW, proof of stake (PoS) relies not on an incredible amount of work being done, but on how much “stake” someone has in the network.
The concept is pretty simple, so let’s not get bogged down in all the technical details for now. In proof of stake (PoS), there are no “miners.” Instead, the network has “validators.” These validators effectively do the exact same job as miners, but they do it in a different way. In both consensus models, these players are the ones who verify and validate that the network is correct, but one uses work, while the other uses stake.
“Stake” refers to how much cryptocurrency from the network a validator has placed on the line. Just like you might say someone has a “stake” in something, we’re talking about people having a vested interest in the success of something. If we say that someone has a “stake” in a company, then that person typically has part ownership or benefits from the company doing well. Because of that, it’s in his best interest to help the company out. If the company does well, so do his stock options! That’s similar to the idea for proof of stake.
How Does Proof of Stake (PoS) Work?
Those looking to be “validators” have to lock up a certain amount of their wealth (i.e. coins) if they want to participate. Because of that, validators don’t have the option of selling or trading their coins while they’re helping to validate the network. Instead, they stay locked up and they’ll regain access to them later.
The work to validate blocks is significantly less since the creator of the new block is decided on based on the amount of stake one has in the network. The amount of mining someone can do in the network is determined on the amount staked. For example, if you happened to have 2% of all ether (lucky you), then you can validate 2% of the transactions in the network with your ETH staked.
Because there’s no more “mining,” proof of stake (PoS) looks to solve the problem of unnecessary power consumption. With that, however, there is no longer a “block reward.” Instead, the validators in the network collect the transaction fees as a reward for their efforts.
To borrow from u/eggsplaner on Reddit:
Proof of Work:
I trust this because it was “carved in stone” and accepted by the community. The work involved in crafting it make it near impossible to tamper with it.
Proof of Stake:
I trust this because it was created by, and signed by people who have a personal stake in it.