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The starting of the decentralization ecosystem was to make sure that there is do duplicity taking place while ensuring there is no need for a third party involvement. To accomplish this goal the developers came up with ‘consensus mechanism’; which helps is legitimising these transactions. That being said, this particular term has been used innumerable times this year alone, thanks to probably the biggest technical event to take place in the crypto space; the Ethereum Merge.
5 Types of Consensus Mechanism in Blockchain
In blockchain, a consensus mechanism is used to validate transactions and ensure that all nodes in the network agree on the state of the ledger. There are several types of consensus mechanisms in blockchain, including:
- Proof of Work (PoW): This is the original consensus mechanism used in Bitcoin. PoW requires nodes in the network to solve complex mathematical problems to validate transactions and add blocks to the blockchain. It is considered to be very secure but requires a lot of computational power, which makes it energy-intensive.
- Proof of Stake (PoS): This consensus mechanism is used in several newer blockchain networks, such as Ethereum 2.0. In PoS, nodes validate transactions and add blocks to the blockchain based on the amount of crypto they hold and “stake” in the network. This reduces the computational power required and makes it less energy-intensive than PoW.
- Delegated Proof of Stake (DPoS): This consensus mechanism is similar to PoS, but instead of every node having a stake in the network, only a select group of nodes (known as “delegates” or “witnesses”) are responsible for validating transactions and adding blocks to the blockchain. This makes DPoS faster and more efficient than PoW and PoS but also more centralized.
- Proof of Authority (PoA): This consensus mechanism is used in private or consortium blockchains, where a group of authorized nodes validate transactions and add blocks to the blockchain. PoA is considered to be fast and efficient but less secure than other consensus mechanisms.
- Byzantine Fault Tolerance (BFT): This consensus mechanism is used in permissioned blockchain networks, where a select group of nodes (known as “validators”) are responsible for validating transactions and adding blocks to the blockchain. BFT ensures that the network can reach consensus even if some of the nodes are malicious or fail.
These are some of the most common consensus mechanisms used in blockchain networks, and each has its own strengths and weaknesses depending on the specific use case.
What is Proof-of-Work
Proof-of-work was the most important consensus mechanism which was ideated in 1993 in order to combat spam and other service abuses. It received its official name as Proof-of-work in 1997. It was heavily unused till Satoshi Nakamoto used it in the development of Bitcoin. Bitcoin used this consensus mechanism to create a network between peers which was further used to secure the Bitcoin blockchain. In this mechanism, the probability of receiving the reward is determined by measuring the work generated. The larger the output of the work, the greater the chances to receive the reward.
The crypto miners are required to solve cryptographic puzzles. Although this puzzle is a little difficult to solve but is easy to verify. Once the solution is found it gets broadcasted onto the network and the other nodes verify it after which the miner receives the reward. For the block to be valid, the output is expected to start with a certain number of zeroes at the beginning of the hash value called “The Difficulty”. The output gets changed by the computing power of the network. The creation of the new blocks is slowed down by the adjusted difficulty of the Bitcoin network.
Advantages and Disadvantages of Proof-of-work
- Higher security level
- Lets the miners earn crypto rewards
- Provides a decentralized method for verifying transactions
- High consumption of energy.
- Expensive fees with low transaction speed.
- Expensive equipment required for mining
Read more: Top 5 PoW tokens by Market Cap
Latest Crypto News on Proof of Work Tokens
- Bitcoin price, which had been doing slightly better than Ethereum price post the Merge, it seems now over the weekend, Bitcoin is attempting to match Ethereum’s bearishness. Bitcoin has now once again fallen down to its long-term trendline support (marked in black). BTC price has fallen down below its psychological support price level of $20,000 and is even below the $19,000 level. This could bring about further bearishness in the king coin going forward.
- DOGE has regained its position among the top 10 crypto assets by Market Cap. The token was helped by the DOT price decrease of more than 11% over the past week, which was an unusual drop even in the background of generally negative sentiment on the crypto market.
- The ETC Price saw a surge in its total value locked amount; more than a 100% increase in its TVL owing to the pouring of more liquidity into the project in anticipation of the Ethereum Merge.
Additional Read: Ethereum Price Prediction
What is Proof-of-Stake
In the proof-of-stake system, validators that are equivalent to miners in PoW are chosen to identify a block on the basis of the number of tokens being held by them rather than having a competition between miners to decide which block to add. This system replaces the work a miner does in PoW with the amount “staked” by the user. The network is secured by this staking structure because the potential participant must purchase the crypto asset and hold it till he is chosen to form a block in order to earn rewards.
Proof of Stake is somewhat similar to depositing money in your bank accounts where interest is generated on the basis of the duration and amount it is being held. Cryptos utilize it by allocating tokens on the basis of their Coin Age. Coin Age is the duration of time for which the tokens are held. For an instance, if 100 tokens are held for 20 days then its coinage is 2000.
In the proof-of-stake mechanism, the size of the stake decides the chances for a validator to be chosen to forge the new block.
Advantages and Disadvantages of Proof-of-stake
- Does not require expensive equipment for participation.
- Fast and inexpensive transaction speed.
- Lacks in terms of security when compared to proof-of-work.
- Validators with large holdings can influence the verification of transactions.
- Few of the PoS cryptos require locking up staked coins for a certain period of time.
Additional Read: Which is the best crypto to invest in?
Ethereum Merge: Why is Ethereum shifting to Proof of Stake?
This has been long awaited by the Ethereum community due to a variety of reasons but has been taking quite some time before the engineers implement the final PoS Etheruem Beacon Chain onto the mainnet. This process is being termed the Ethereum Merge – where the PoS-enabled Beacon Chain has been merged into the mainnet.
The reasons why this shift is beneficial is:
- Being the largest smart contract capable blockchain network in the crypto space, this move will bring about a massive increase in the speed of processing transactions on the chain, thus making the Ethereum experience more quick and efficient
- One of the major reason is, being the largest PoW-based smart contract blockchain, the Ethereum network consumes a huge amount of energy. Thus a shift to PoS would cut down the global energy consumption by the Ethereum network by 99.95% (according to or Ethereum.org), which is a total of 0.2%, the biggest decarbonization ever.
- Ethereum is still the largest, but a lot of newer and more efficient blockchains are quickly catching up with it, hence this move would serve in keeping Ethereum as the leader in the space.
Know more about: Ethereum Shanghai Upgrade
Top 5 PoS tokens by Market Cap
Latest Crypto News on Proof of Stake Tokens
- Post the Ethereum Merge, Ethereum price has been one of the worst hit tokens amongst the largest cryptos by market cap. On the charts, it has lost over 20% since the Merge and is still strongly going downward. It lost over 8% on the day of the Ethereum Merge and over the past 24 hours, it has lost well over 10%! This is a very significant fall in terms of absolute values and ETH price has fallen well below the crucial psychological price level of $1500 and is currently trading close to $1300, a far cry from the $2000 it had managed to touch just a few weeks ago.
- A few days ago BNB Chain confirmed that it had partnered with Google Cloud for the provision of cloud infrastructure for high-growth Web3 projects. In their September 14 announcement, they announced a collaboration to provide cloud computing services and enhanced technical support for early-stage web3 and blockchain projects deployed on BNB Chain. Read more on BSC News
- Just a little over a month ago, IOHK developers had successfully hard forked the Cardano testnet with the Vasil upgrade. Cardano’s Vasil Hard Fork is the next step in its plan to improve the speed and scalability of the network. This essentially brings the project one more step closer to dethroning the largest smart contract and DeFi platform out there – Ethereum. With this latest upgrade, Cardano’s developers hope to improve the efficiency of smart contracts to make Cardano cheaper and faster to use.
- Bitcoin has been performing amazingly well since 2023 and has been named as the top performing asset of 2023 by Glassnode.
- Litecoin price has seen a surge, mostly due to the series of developments that are in the pipeline along with the hard fork that is coming in less than 120 days from April 21, 2023
Key Differences Between Proof of Work and Proof of Stake
The two most commonly used consensus mechanisms; Proof of Work (PoW) and Proof of Stake (PoS) are used by various crypto projects to validate their transactions and add new blocks to the blockchains.
Here are the key differences between PoW and PoS:
- Resource utilization: In PoW, miners need to solve complex mathematical problems using computational resources to validate transactions and add blocks to the blockchain. This process requires a significant amount of computational power, electricity, and specialized hardware, which makes it resource-intensive. In contrast, PoS requires validators to hold a certain amount of crypto to validate transactions and create new blocks. This negates the need for huge resources for mining.
- Security: PoW is considered to be a more secure consensus mechanism due to its robust security against 51% attacks. In PoW, a miner needs to control 51% of the network’s computing power to launch a successful attack, which is extremely difficult and expensive. In PoS, the security of the network depends on the amount of crypto held by validators, which makes it more vulnerable to attacks if a large number of validators collude.
- Decentralization: PoW is often criticized for its centralization of mining power in the hands of a few large mining pools, which can lead to centralization of the entire network. In PoS, the amount of crypto held by validators determines their voting power, which can also lead to centralization if a few large stakeholders control a significant portion of the crypto supply.
- Energy efficiency: PoW is known for its energy-intensive nature, as miners need to solve complex mathematical problems using computational power. This has led to criticism of PoW for its environmental impact. PoS, on the other hand, requires less energy as it eliminates the need for resource-intensive mining.
Overall, PoW is more established and widely used, but PoS is gaining popularity due to its energy efficiency and lower resource requirements. However, both consensus mechanisms have their advantages and disadvantages, and the choice between them depends on the specific requirements of the blockchain project.
Proof of Stake vs Proof of Work – Which is better?
In short, there are a few fundamental differences which set the Proof of Work and the Proof of Stake apart from each other. Below mentioned are some of those fundamentals:
- PoW is the first generation of consensus mechanism that was born with the birth of Bitcoin, while PoS is the next generation of a consensus mechanism and some of the biggest networks employing this method include Cardano (ADA) and Algorand (ALGO). Even Ethereum, the largest smart contract blockchain out there is slated to transition from PoW to PoS.
- PoW involves competing to solve a complex mathematical problem to get the chance to verify the block while PoS works on the principle of staking.
- Due to the difference in principles – PoW uses a lot more energy to do verify one block, while PoS is able to do that same function at a tiny fraction of what PoW uses.
- PoW is a much slower process due to the way it functions while PoS is faster than PoW in verifying transactions by an order of magnitude, which is also due to the way it performs the consensus
Looking at the fundamental differences between the two major consensus algorithms does not negate the cons absolutely. Below are some of the Pros and Cons of the Proof of Work and the Proof of Stake consensus.
|Proof of Work
|Proof of Stake
|Enhanced security compared to Proof of Stake as miners use energy-intensive operations to add transactions to a block.
|Highly energy efficient as compared to PoW
|Offers better decentralization as the authority of managing transactions is distributed to miners.
|Dramatically faster in processing transactions
|Less likely to get attacks as mining and verifying transactions on PoW requires expert computational knowledge.
|Doesn’t require special equipment like ASIC chips required for mining in PoW
|Proof of Work
|Proof of Stake
|PoW is energy exhaustive and produces carbon footprint in abundance.
|Not as proven in terms of network security as PoW
|Requires expensive equipment and resources to run PoW operations.
|Validators with a large number of coins staked can exert influence on verification
|High network fees and slow processing time causes network congestion.
|Coins in PoW need to be locked up in the smart contract and may have a lock-in time
What does all this mean for Crypto investors?
This transition of the ethereum Network to the Proof of Stake consensus is majorly to negate the energy consumption. With this transition, Ethereum is now an energy-efficient blockchain; which is not only saving a whole of 0.2% of the global energy, but also working towards faster block validations and more secure network! The Ethereum Developers is already working towards the next step in this transition process, the Shanghai Update!
Additional Read: How will Ethereum Proof of Stake work?
Top FAQs on PoS & PoW
Is Bitcoin proof of work or proof of stake?
Bitcoin network uses Proof of Work consensus.
Is proof of stake better than proof of work?
Proof of Stake is better than Proof of Work in the sense that it is much more energy efficient and validators do not require as intense a method before adding a block into the network.
Is Ethereum a PoS or PoW?
Ethereum is now a Proof of Stake (PoS) system after its transition via The Merge and the Shapella upgrade.
Why is PoS faster than PoW?
PoS crypto assets work faster than PoW as the processes set for the validation of the blocks are faster and advanced.
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