crypto transactions are verified through mining. In this, an individual does cryptographic transactions to verify a particular connection, which is basically mining, that one sees in crypto.
Crypto investors must have heard about Proof of Work (PoW) and Proof of Stake (PoS), the two different mechanisms to validate crypto transactions. They are an essential component of blockchain technology and security.
All decentralized blockchains like Bitcoin or Ethereum require computers to ‘prove’ their presence on the network to validate transactions. PoW and PoS are the most prominent ones among them.
Both are known as consensus mechanisms – the standardized and trusted way of how the blockchain’s nodes. Despite being different, both mechanisms ensure honest transactions and reduce fraud.
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The significant differences between Proof of Work and Proof of Stake are transaction fees, speed and efficiency. PoS outpaces PoW in all these aspects, said Edul Patel, CEO and Co-founder of Mudrex.
“PoW uses a competitive validation method to confirm transactions. PoS uses randomly selected miners to confirm and add new blocks to the blockchain,” he added.
In PoW, crypto transactions are verified through mining. In this, an individual does cryptographic transactions to verify a particular connection, which is basically mining, that one sees in crypto.
The mining process in Proof of Work consensus is energy extensive as it requires a lot of electricity and other resources to verify transactions, create new tokens, and add new blocks to the network, said Amit Nayak, CEO and Co-Founder, Sahicoin.
“The Proof of Stake mechanism achieves the same with fewer resources and less complexity. Unlike PoW, participants stake a certain amount of crypto and are selected randomly to validate the transactions in the PoS system,” he added.
In proof of stake, validators are chosen based on a set of rules depending on the ‘stake’ they have in the blockchain.
In proof of stake, there are certain people, who are known validators and they validate the transactions happening in the ecosystem, said Gaurav Dahake, CEO & Founder, Bitbns
Utility of PoW and PoS
The utility of both the consensus mechanisms is to validate transactions. Proof of Work enables agreement on which block to add by requiring network participants to expend large amounts of computational resources and energy on generating new valid blocks.
Proof of stake, on the other hand, uses less energy compared to Proof of Work but does the same thing as it was created as an alternative. But PoS requires participants to stake cryptocurrency in the form of collateral to add a new block in the digital ledger blockchain.
Most of the new cryptocurrencies such as Cardano, Solana, Tezos, Avalanche are using the Proof of Stake mechanism for running their networks.
Cryptocurrencies that work on the PoS mechanism are good investment opportunities for investors, said Nayak from Sahicoin. This is mainly because they can make more profits from trading as well as from staking.
“Cryptocurrencies unlocked a new way of generating a passive income stream through staking through several methods – utilizing staking services of crypto exchanges, joining staking pools, and being a validator for PoS networks,” he added.
PoW vs PoS: Which is better?
Both of the mechanisms have their own pros and cons. Proof of Work is a competition between miners to solve the cryptographic algorithms or equations and validate the transactions to earn blockchain rewards.
On the other hand, Proof of Stake implements randomly chosen validators to make sure the transaction is reliable, compensating them in return with crypto.
According to Dahake of Bitbns, the investors can choose as per the required criteria. Although, they don’t sort of differ in terms of how well they can scale or grow.
Ethereum was shifted from Proof Work to Proof of Stake over time to facilitate more speedy transactions like from payments to gaming.
On the other hand, Patel from Mudrex believes that Proof-of-stake is the best choice for investors as transactions are faster and less expensive.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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