Blockchain uses various approval algorithms such as PoW (Proof of Work) and PoS (Proof of Stake) for transaction approval.
Read on for a simple breakdown of PoW and PoS consensus algorithms, with differences explained using Bitcoin.
What is a Consensus Algorithm?
Blockchains process data using a distributed network, without a central administrator; therefore, each computer holds the same data and forms consensus as any other node. The network maintains the accuracy of the ledger using consensus algorithms.
PoW (Proof of Work)
When a transaction is made, the transaction is approved by a third party. The authorization process is completed by solving calculation problems – approval rights are given to those who solve the problem in the least amount of time.
Proof of Work: Miners compete to be the first to find a solution for a given arithmetic problem; the problem is impossible to solve in any other way than process of elimination. It requires massive computing resources.
When a miner finally finds the right solution, it is announced to the network. If the network concedes that the solution is accurate, the miner receives areward from the protocol.
Difficulty is what determines the competitive nature of mining: the more computing power added to the network, the more the average number of calculations needed to create a new block increases. This also increases the cost of the block creation and forces miners to improve efficiency. New blocks are generated every 10 minutes.
PoS (Proof of Stake)
Bitcoin uses PoW, but Waves and Bitshars and other cryptocurrencies use PoS, which is a mechanism for approval/data falsification prevention.
POW rewards miners who solve mathematical problems with the goal of validating transactions and creating new blocks, but with PoS, new blocks are adopted based on a miner’s share in the system. There is no block reward, so the miners take the transaction fees.
Differences between PoW and PoS?
Both PoW and PoS are methods of approving transactions in the virtual currency.
In order to maintain the blockchain, a large number of participants are necessary.The following points try to simplify/abstract:
Each cryptocurrency has its own blockchain to store all the transactions that occurr.
Proof of work/stake algorithm are different method of achieving consensus regarding which block will be added next.
Proof of work (PoW) requires proof that some sort of work was carried out. In the case of Bitcoin, the work is solving complex equations. Bitcoin miners are required to do this work if they want their block to be apprved, resulting in a reward.
Proof of stake (PoS) requires users that have a high stake in the system (i.e. hold a certain amount of coins) to determine the next block. This results in the risk of a single party garnering a monopoly. There are, however, several methods to prevent that (i.e. allocating random stakeholders to agree on a new block).
The main difference could be summarized in that proof of work requires an external resource (mining hardware) while proof of stake does not.