DIGITAL ASSET GLOSSARY

Proof of Work / Proof of Stake

Proof of work and proof of stake are two mechanisms through which cryptographic transactions can be verified and new blocks added to the blockchain.
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March 16, 2021

Proof of work and Proof of Stake are two mechanisms through which cryptographic transactions can be verified and new blocks added to the blockchain.

Blockchain platforms use either one or the other.

For example, Bitcoin uses proof of work, while Tezos and NEO use proof of stake.

Ethereum used proof of work but switched to proof of stake in December 2020.

Proof of Work

Proof of work is the solution to a mathematical problem. It has two functions:

  • Creating new coins. This happens when miners on a cryptocurrency network compete against each other to solve a mathematical problem. The first miner to find the correct solution is rewarded with the new coins
  • Verifying that individual transactions have followed the network’s rules. In particular, proof of work prevents users from fraudulently inflating their cryptocurrency holdings by creating coins they haven’t earned or spending the same coins twice (double-spending).

Proof of work is intentionally very complex to produce and its rewards are random. This is to ensure no single miner or group can gain an unfair advantage and be in a position to influence the network.

But proof of work is also easy to verify. This allows transactions to get approved and new blocks to be added to the blockchain relatively quickly.

Proof of stake

Proof of stake is the main alternative to proof of work.

In proof of stake, miners have to deposit a number of coins — the stake — in a special wallet to get the chance to validate transactions and mine new blocks. Every network that uses proof of stake has its own rules around this, including the minimum stake you must deposit.

Your stake remains frozen for as long as you’re mining or verifying transactions. And you lose it if you try to game the system, for example by submitting a faulty block or trying to spend the same coins twice.

But unlike proof of work, it’s not the first miner to find the right solution who wins the reward in proof of stake. The network’s algorithm chooses the winner.

The algorithm chooses the winner randomly. But your chances of winning are linked to the size of your stake as a percentage of the total number of coins in circulation. So if there are 5,000 coins in circulation and you’ve staked 500 coins, for instance, you have a 10% chance of winning.

 

AtoZ-Digital Assets Glossary-Definitions-Proof of Work-Proof of stake-16

 

Some facts

Proof of work was fundamental to getting Bitcoin off the ground, because it solved the issues — particularly double-spending — created by the fact there’s no central authority to regulate the system.

While proof of work may have solved issues that had previously made cryptocurrencies unworkable, it has problems of its own. In particular:

  • It’s resource intensive. Bitcoin miners, for instance, use more energy than Ireland and five times the output of Europe’s largest wind farm in a given year.
  • It has vulnerabilities. If a miner (or a group) manages to gain control of 51% of the network’s computing power, they can break the network’s rules, including blocking valid transactions and double-spending. This is known as a 51% attack. There have been no known successful 51% attacks to date, but they’re theoretically possible.

Because you need huge amounts of computing power to be a miner, networks that use proof of work have become somewhat centralized. On the Bitcoin network, for example, about 50% of the computing power is currently split between just three mining groups.

Proof of stake aims to solve proof of work’s flaws, particularly electricity consumption. But it also has weaknesses.

Specifically, some argue that miners have nothing to lose and everything to gain by staking multiple versions of the same blockchain, because their interest lies in ensuring their stake holds or increases its value. This could prevent new blocks from being validated. This is known as the ‘nothing at stake’ problem.

Want to know more?

  • CoinTelegraph’s Proof of Work explainer is highly readable and thorough. It walks you through the rationale behind proof of work, how it works — including what sorts of mathematical problems miners have to solve and how they solve them — and discusses the mechanism’s flaws.
  • Proof of stake’s creators Scott Nadal and Sunny King explained their thinking in this white paper published in 2012. Their prediction that proof of stake would become more competitive than proof of work seems remarkably prescient: Ethereum’s switch in December 2020 has made proof of stake a dominant force in the crypto space. Proof of stake-based networks now collectively make up 15% of the total crypto market cap

The Metaco view

“Proof of work is often criticised for being energy-intensive. But with 30% of it now powered by renewables, we think there’s incredible potential for mining to be a boon for sustainable, eco-friendly technologies.”

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