Definition
“Proof of work” and “proof of stake” are the two major consensus mechanisms cryptocurrencies
use to verify new transactions, add them to the blockchain, and create new tokens. Proof of
work, first pioneered by Bitcoin, uses mining to achieve those goals. Proof of stake — which
is employed by Cardano, the ETH2 blockchain, and others — uses staking to achieve the same
things.
Decentralized cryptocurrency networks need to
make sure that nobody spends the same money twice without a central authority like Visa or
PayPal in the middle. To accomplish this, networks use something called a “consensus
mechanism,” which is a system that allows all the computers in a crypto network to agree about
which transactions are legitimate.
There are two major consensus mechanisms used
by most cryptocurrencies today. Proof of work is the older of the two, used by Bitcoin,
Ethereum 1.0, and many others. The newer consensus mechanism is called proof of stake,
and it powers Ethereum 2.0, Cardano, Tezos and other (generally newer) cryptocurrencies. To
understand proof of stake, it’s helpful to first understand proof of work, so we’ve paired
them in this explainer.
What is proof of work?
Proof of work is the original crypto
consensus mechanism, first used by Bitcoin. Proof of work and mining are closely related ideas. The reason it’s
called “proof of work” is because the network requires a huge amount of processing power.
Proof-of-work blockchains are secured and verified by virtual miners around the world racing
to be the first to solve a math puzzle. The winner gets to update the blockchain with the
latest verified transactions and is rewarded by the network with a predetermined amount of
crypto.
Proof of work has some powerful advantages,
especially for a relatively simple but hugely valuable cryptocurrency like Bitcoin (learn more about how Bitcoin works). It’s a
proven, robust way of maintaining a secure decentralized blockchain. As the value of a
cryptocurrency grows, more miners are incentivized to join the network, increasing its power
and security. Because of the amount of processing power involved, it becomes impractical for
any individual or group to meddle with a valuable cryptocurrency’s blockchain.
On the flip side, it’s an energy-intensive
process that can have trouble scaling to accommodate the vast number of transactions smart-contract compatible blockchains like Ethereum can generate. And so alternatives have
been developed, the most popular of which is called proof of stake.
What is proof of stake?
Ethereum’s developers understood from the
beginning that proof of work would present limitations in scalability that would eventually
need to be overcome — and, indeed, as Ethereum-powered decentralized finance (or DeFi) protocols have
surged in popularity, the blockchain has struggled to keep up, causing fees to spike.
While the Bitcoin blockchain mostly just has
to process incoming and outgoing bitcoin transactions, much like a vast checkbook, Ethereum’s
blockchain also has to process a vast array of DeFi transactions, stablecoin smart contracts, NFT minting and sales, and whatever innovations
developers come up with in the future.
Their solution has been to build an entirely
new ETH2 blockchain — which began rolling out in
December 2020 and should be finished in 2022. The upgraded version of Ethereum will employ a
faster and less resource intensive consensus mechanism called proof of stake. Cryptocurrencies
including Cardano, Tezos, and Atmos all use proof-of-stake
consensus mechanisms — with the goal being to maximize speed and efficiency while lowering
fees.
In a proof of stake system, staking serves a
similar function to proof of work