Matt and Blake got together this week to discuss the differences between two very important concepts in crypto, Proof of Work (POW) and Proof of Stake (POS).
One of the best features of cryptocurrencies is that there's no need for a 3rd party such as a bank to validate transactions on the blockchain. Two strangers can send money to each other with confidence thanks to the consensus mechanisms mentioned above.
POW and POS are completely different, especially from an economic standpoint.
Listen to the podcast for a full breakdown:
Here is a brief overview of each one:
Proof of Work
Proof of Work is what’s currently used by the Bitcoin protocol. “Miners” race to solve mathematical puzzles using real power and electricity with the goal of solving this problem and receiving a reward in the form of bitcoin. Solving the puzzle confirms that the transaction happened, which in turn makes the network secure from anyone looking to tamper with the blockchain. Miners are running capital intensive businesses and they are competing globally to solve these puzzles as fast as they can. This competition also results in the decentralization of the network to due the vast amount of participants in the space.
Proof of Stake
Ethereum currently uses Proof of Work as well, however they are planning a shift to Proof of Stake to validate transactions on the Ethereum blockchain. Users will have the opportunity to take a portion of their funds, and “stake” them on the network which actually freeze those assets and prevents them from being spent. They are then paid out a commission based off how much they decide to dedicate to the network.
Now although this uses much less energy than Proof of Work, it hasn’t been proven to actually secure the network just yet. In fact, it also enables the biggest whales to further enrich themselves as bigger stakes will generate bigger commissions. Time will tell if this is actually a viable solution.
While Proof of Work isn’t perfect, you can’t argue that it seems to be working just fine. And although everyone wants a bigger and better version of Bitcoin, does it make sense to fix something that isn’t broken? We’d love to hear your thoughts.
Feel free to reach out to us and let us know what you think the pros and cons of each consensus mechanism are. And if you’re still having trouble grasping these concepts, that’s fine too. Reach out and we can break it down for you even further.