A general overview of cryptocurrencies tells you that they work as decentralized currencies, unlike the traditional currencies that we use. However, when we go in-depth, there are many things that we come to know. Usually, this happens when it is about mining a cryptocurrency or knowing the in-depth working methodologies of a cryptocurrency.
One of the most important things about cryptocurrencies is the algorithms and mechanisms for consensus that allow these currencies on blockchain technology to work securely. These are known as Proof of Stake and Proof of work. These are also getting very popular these days because of the votes of the EU parliament committee.
So, if you are also looking to know what this buzz is all about and which of these is better, you are at the right place. Read till the end to know all that you need to know.
Proof of Work VS. Proof of Stake: an overview
When you see both of these in an overview, there will not be a lot of differences. The basic mechanisms are the same, and they decide how different participants can decide about the transaction blocks being added to the blockchain technology. While most things are the same, the way things end makes the real difference between these two.
One of these works makes it necessary to expand the resources, including computational hardware and energy. The other one needs the participants present on the network to stake cryptocurrency. The result is always the decision about adding a new block to the blockchain.
What is Proof of Work?
It is the consensus mechanism that works according to solid results. So, it involves a competition between different blocks. This competition sees which blocks are the best in its favor, so it selects that one. A way of checking this here is to see which of the blocks got the highest computational work done for it being added to the chain. Bitcoin started in 2009.
In this way of working, it makes it significantly difficult for the bad actors of the system because they will eventually be going in loss and spending double of what they might be making. With all of its benefits, it is more democratic. It gets better favor from the participants on the network, including the newbies and the older ones, because of the certain way of development of its algorithms.
Pros of Proof of Work
- It is properly decentralized with fewer chances of moving towards being centralized.
- It is the only mechanism for consensus and algorithm for blockchain that is proven with results.
- More efficient
- Higher security
- More hardware complexity means better security
Cons of Proof of Work
- Powerful hardware needs more electricity. So, running it without sustainable electricity is not a good option.
- Traceability and censorship are major cons
- The amount of e-waste it produces can be alarming
- Scalability is not that easy here
- A bit slow in comparison
Examples of applications of Proof of Work
The following are some of the examples of applications of Proof of Work
- Bitcoin Cash
- Dogecoin (potential transition to PoS)
What is Proof of Stake?
Do you know the concept of voting? Well, things are a bit similar to voting, where participants are staking. However, a major difference is that there are no limits like only one vote for one person. It depends on the blockchain that sets the limits, and the participants can stake different amounts on crypto within that limit.
As it allows staking cryptocurrencies, there is no need to spend on higher-end resources and more energy. There is no complex hardware addition needed here, things are better, more efficient, and simpler. It is also because of better scalability and quick approvals.
An important thing to consider here is that individuals with higher and more stakes are valued more. It somewhat takes the main concept back towards centralized finance. Similarly, there has been no proof of it being better in comparison. The cryptocurrencies that work on it are not that old themselves if it is about testing the effectiveness of the mechanisms and algorithms.
Pros of Proof of Stake
- It provides economic incentives. This incentive is vital for getting the valid blocks approved more easily.
- Censorship resistance
- It is better in terms of scalability
- Allows faster transaction because there is no hardware involvement for solving complex equations
- It is not that bad for the environment of the earth because of fewer energy requirements.
Cons of Proof of Stake
- There are chances of it being less secure in comparison
- It is not that mature in terms of performance and scalability
- Centralization is a major issue here because that kills the purpose of blockchain technology.
Examples of applications of Proof of Stake
The following are some of the examples of applications of Proof of Stake
Ethereum’s transition to PoS
As we mentioned before, Ethereum will soon complete its transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). The upgrade will make ETH “more scalable, more secure, and more sustainable”.
The first phase, called “The Beacon Change” (Phase 0), launched on 1 December 2020 and the full release is estimated to happen later in 2023. Ethereum 2.0 is currently live on the testnet, with holders already staking nearly 11 million ETH. Ethereum 2.0’s release is staggered into distinct sections: The Beacon Change, The merge, and Shard chains.
The second stage is ‘The merge’. In this phase, the Beacon Chain will merge into the mainnet and put the end of PoW algorithms. The final stage will be the implementation of Shard chains. Introducing this will allow a high scaling of Ethereum, as transactions can be split across 64 new chains. This will make possible to handle 100,000 transactions per second while now it can only handle around 30.
This transition, besides the benefits it will bring to Ethereum, will have an impact mostly on Ethereum miners rather than holders, as the shift to PoS will see ‘staking’ take over from ‘mining’ to approve transactions on the Ethereum blockchain.
European Parliament Committee supporting Alternative Amendment on Crypto Assets
Different countries around the world have been against Proof of Work because of its major cons. This Monday, March 14th, MiCA (Markets in Crypto Assets) legislative framework proposed a provision looking to oblige proof-of-work cryptocurrencies to switch to the more environmentally friendly proof-of-stake. the provision stated that crypto assets “shall be subject to minimum environmental sustainability standards with respect to their consensus mechanism used for validating transactions, before being issued, offered or admitted to trading in the Union.”
The EU Parliament Committee had to vote on this to decide on limiting PoW or not. Most major companies and participants on the network relied on this. The result was a majority of votes against the limitation and the support for an alternative amendment. However, there were discussions about mining using sustainable ways by 2025. For now, there have been 31 votes against the limitation, o “ban” as it’s being called.
“It is crucial for me that the MiCA report is not interpreted as a de facto ban on bitcoin,” Stefan Berger, a member of the European parliament.
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