It’s likely you have heard of both proof-of-stake and proof-of-work. These two concepts are essential to cryptocurrency transactions, security, and are key aspects of blockchain technology and how it works.

Proof-of-stake and proof-of-work are the two major consensus mechanisms that are used by crypto trading platforms around the world. They both operate in different ways, but have the common goal of making sure users are honest by verifying new transactions, adding them to the blockchain, and creating new tokens.  

In this article, we take a look at what defines the two consensus mechanisms, and where the differences between the two lay. 

What Is Proof of Work? 

Known as the original crypto consensus mechanism, proof-of-work was first used by Bitcoin and is closely related to the idea of mining. It is called proof-of-work due to the large amount of processing power where blockchains are secured and verified by virtual miners. The miners are racing against each other to be the first to solve a highly complex algorithmic puzzle. The winner gets to update the blockchain with the latest verified transactions and is rewarded with a certain amount of crypto. 

Proof-of-work has many excellent advantages, especially for Bitcoin. It’s a proven way of maintaining a secure decentralised blockchain. As the value of a cryptocurrency like Bitcoin grows, there is more incentive for more miners to join the network, which increases its overall power and security.  

However, as proof-of-work requires a huge amount of energy, this method is far less environmentally friendly compared to other systems. Another issue that lies with proof-of-work is that because of the competition between miners, a small number of mining pools control the blockchain, and results in a kind of centralization and goes against the ethos of blockchain technology.

What Is Proof-Of-Stake

Given the limitations of proof-of-work, developers knew there had to be another mechanism that could be scalable and keep up with an ever-expanding blockchain. In a proof-of-stake system, staking is similar to mining, in that it’s the process of a network participant getting chosen to add the latest batch of transactions to the blockchain and earn crypto in exchange. 

The difference is that proof-of-stake blockchains employ a series of ‘validators’ who stake their own crypto in exchange for the chance to validate new transactions, update the blockchain, and earn a reward. The winner of this reward is selected based on the amount of crypto they have in their pool and the length of time that they have had it for. 

The main issue with proof-of-stake is that it requires a fairly high level of technical knowledge, along with an enormous initial investment, from the validator. Having to make these costly investments has the potential of leading to an exclusively rich blockchain, where only the wealthy can become validators. 

Think10 Insight

There are both pros and cons between proof-of-stake and proof-of-work. Of course there is no right or wrong answer, only many different points of view. In the end, both consensus mechanisms will be part of cryptocurrency for a very long time and it’s highly likely that if you interact with cryptocurrencies, then you will be working with both systems.  

At Think10, we’re committed to providing forward-thinking entrepreneurs with the support that you need for long-term success. We take an informed and reasonable approach to investment, and are always thinking ten steps ahead. If you want to learn more about how consensus mechanisms work – contact us today.

Chris Cutout

Chris Dixon

Fund manager

cd@think10capital.com

Chris Dixon is a Think10 Capital’s Digital Fund Manager with specific responsibilities of managing digital funds and driving strategic growth. Dixon brings his experiences in capital and investment management through prior involvement in private equity and institutional investment in the United States. Over the past decade Dixon has lived and worked in Melbourne, Australia where he now resides.