To verify and validate a transaction or block, Bitcoin, Ethereum and many other blockchain platforms use the Proof of Work (PoW) consensus model.
In a PoW consensus system, the creator of a new block is determined by some mathematical algorithm. The biggest problem with PoW is that it requires a lot of computing and electrical power. Proof of Stake (PoS) is a newer consensus model that determines the creators of new blocks based on the stakes, which is the amount of coins “locked” in participating wallets in order to provide security for the network.
It reduces energy consumption compared to PoW and rewards staking wallets with minted coins in exchange for network protection.
Proof of Work(PoW)
Proof of Work (POW) is an algorithm that rewards the first person or group of people [pool] to solve a computational problem to achieve a distributed consensus.
While Nakamoto has improved on Adam Back’s Hashcash work, he has created a validation system that relies on cryptographic hashing rather than the trust of a centralized system.
The Bitcoin network creates and distributes in a completely random manner a certain amount of coins approximately six times per hour to clients that actively participate in the network, i.e. that contribute their computing power to the management and security of the network.
The activity of generating bitcoins is often referred to as mining, a term analogous to gold mining. The probability that a certain user will receive the reward in coins depends on the computational power he adds to the network relative to the total computational power of the network.
Initially, the client itself took care of the calculations required to mine bitcoins, using only the CPU. As the total computing power of the network increased and due to the competitive nature of bitcoin generation, this functionality became uneconomical and was removed. Today, there are specialized programs that initially exploited the power of GPUs and FPGAs, and now use dedicated hardware based on ASIC processors designed for this use.
Since the average number of operations needed to successfully close a single block has become so large that it requires large amounts of resources in terms of electrical power and computational power, most miners join together in ‘guilds’ called mining pools where all participants pool their resources and then divide up the blocks generated according to their contribution.
Proof of Stake (Pos)
Proof of stake (PoS) is a type of algorithm with which a cryptocurrency blockchain network aims to reach a distributed consensus. In PoS-based cryptocurrencies, the creator of the next block is chosen through various combinations of random selection and wealth or age (i.e. stakes).
The proof of participation must have a way to define the next valid block in any blockchain. Selection based on account balance would result in (undesirable) centralization, as the single richest member would have a permanent advantage.
Other projects use Delegated Proof of Stake or DPoS. The system uses a limited number of nodes to propose and validate blocks to the blockchain. This is intended to keep transaction processing fast, rather than using several hundred or several thousand nodes. For example, EOS uses a limited number of block validators, 21, whose reputation may or may not decline, allowing backup validators to replace previous nodes.
Incentives differ between the two block-generation systems. With PoW, miners could potentially not own any of the currencies they are mining and thus only seek to maximise their profits. It is unclear whether this disparity reduces or increases security risks. With PoS, however, those who ‘locks’ the coins always own the coins, although several cryptocurrencies allow stakes to be held on behalf of other nodes. PoS has a significantly lower energy consumption than PoW.