Proof of Stake vs Proof of Work Explained
This won’t be just another article to tell you the differences between the proof of stake vs proof of work. We’re going to simplify the two algorithms so that you understand the basic mechanics to make an informed decision PoS vs PoW.
Blockchain, in a nutshell, is the stringing together of transactions that are in chronological order for processing (read this – proof of stake explained).
Most popular PoS coins are Bitcoin, Ethereum, Ripple XRp, Litecoin, NEO, and “IOTA.”
✅ Yes, the significantly varying costs of investment depending on the energy costs in your country has played a huge role in the migration to PoS as that is more fair as it’s based on the value of the coins which anyone can purchase.
✅ Yes, you’re able to create a personal wallet when you buy crypto from most platforms. You can receive and send crypto for most platforms but some allow you to earn crypto through staking.
✅ You can earn more with PoS than PoW. PoW costs are cheaper for a miner entering the market today than those who are already invested. The investment is largely dependent on the cost of energy in your specific country which can vary and therefore producing equally erratic results for investors.
PoS is an ideal way of earning income. It has sentiments of the centralised form of banking with a few rich validators generating the largest portion of income from PoS coins. The quantifiable cost of staking provides for a more secure investment but the earning can vary according to each miner and they’re computing power as well as energy costs.
It’s essential always to understand the intrinsic risk that exists in all investments. The risk of not investing can be far higher when taking compounding effects into account. A comparison can only look to provide accurate comparison while honestly stating that there are successes on both sides of the PoW vs PoS algorithm.
A fair comparison should also result in an opinion based on the information gathered from the data. We’ll review that in this article.
The evaluation and review of each coin should be an ongoing process, but we strive to make that process easier by better understanding the underlying processes.
We’re not just fellow crypto currency investors which makes us more invested in the information within circulation than most other reviewers. Successful background in the staking industry has provided us the opportunity to position ourselves within a new industry to take advantage of the opportunities that abound.
Proof of stake and Proof of work
These PoS PoW algorithms with the same purpose: to establish consensus on the blockchain. Before we explain further, we need to agree on a particular state of the blockchain.
PoW
Proof of work is the original crypto harmony mechanism that was first employed by Bitcoin. Proof of work vs. proof of stake – mining have a significant amount in common. The motive behind calling it “proof of work” is because the grid needs an incredible amount of power in order to process it.
Proof of work is used to decide how the blockchain reaches harmony. To phrase it differently, how can the network be certain that the settlement is real and that a person is not trying to do criminal activity, for example using the same funds more than once?
Proof of work is centred around a very special form of maths called cryptography. That is the reason that digital currencies like Bitcoin and Ethereum have been dubbed cryptocurrencies.
Digital currencies such as Bitcoin use mathematical problems that are so advanced that only very powerful computers can figure them out. In cryptography there is no equation that looks the same as another one, which indicates that when a certain equation has been solved the network is able to recognize that the agreement or exchange of money is a legitimate one.
It’s essentially a competition that rewards the person with the most resources, in this case computing power and energy.
Various other distributed ledgers mimicked the method used by Bitcoin and also adopted the proof of work method. Proof of work requires a considerable amount of electricity, however it’s also quite restricted, in the whole number of transactions it can process at the same time.
PoS
Proof of Stake was first created in 2012 by Scott Nadal and Sunny King. Peercoin was the first-ever blockchain project to use the proof of stake model. It has a more equitable and more equal mining system, more transactions that can be scaled up, and less need for electricity.
Ethereum, the second most popular cryptocurrency in the world, is in the process of moving from Proof of work to Proof of stake, although the Ethereum proof of stake date is yet to be confirmed. Essentially each validator stakes a number of coins based on the value they’ve purchased.
This is their stake to pledge commitment to the integrity of the coin. Should they validate a lousy coin, this stake is slashed as a means of punishment and incentive to validate effectively.
Proof of stake vs Proof of work – which technology is better?
The use of energy is the major separator between the two concord mechanisms. Proof of stake vs proof of work cryptographic ledger doesn’t require miners to use power on repetitious methods; proof of stake permits systems to work without using such a large amount of funds to accomplish its purpose.
Both proof of work proof of stake systems have strict rules that chastise any problems in the network and those who are trying to take advantage of the system. In the proof of work system, the results of putting work or information that is not right is the amount of energy and time used as well as the power from the computer needed to carry out instructions.
In the system dubbed proof of stake, the confirmation tool accepts a bad clock; a piece of their staked funds will be slashed as a penalty, a process called slashing. The amount to be slashed depends on the network.
Proof of stake advantages
It‘s important to note that cryptocurrency is an ever-changing industry with variables that we can hardly begin to understand. The direct comparison of the two proof of stake proof of work systems provides us with the opportunity to make a judgement on the advantages and disadvantages only in that vacuum.
Proof of stake consumes less energy power. It’s a far less expensive coin to secure. Lots of centralised holders who have gotten rich by staking.
Favours incumbents, which is how the current banking system works. It forces coin holders to stake their coins if they want to keep up. It forces them to take on the risk of staking. If you don’t stake, then you’ll get diluted. Participation of the validators is exceptionally high due to the same fears that drive investment rather than saving, which is diluted.
Proof of work disadvantages
Weak to external attacks on the blockchain. It depends on the price of electricity. This means the cost of mining will differ from one country to the next. It incentivises innovation.
The mere fact that it is a competition means that every individual has an interest in coming up with the best solution in the best way possible. They are highly competitive, which is the essence of capitalism.
PoW vs PoS coins
There are a number of coins which can earn you passive income in a number of different ways. We’re going to look at the most popular coins and the trends going into the future.
Trending PoW and PoS coins
Everyone is moving from PoW to PoS because of the energy efficiency of using proof of stake. Cryptocurrency has opened the door for passive income for the average man in the street.
NEO, TEZOS(XTZ), DASH, QTUM, CUTcoin, and PIVX
PoS currencies are currently one of the more innovative ways of earning passive income. It’s also the staking that is gaining momentum and taking over the crypto space, which is why it’s easier to see why more coins use this method.
It may be easy to trend in the right direction for a season, but you need to be extremely good and effective in order to remove the incumbent, which is what PoW coins are.
The largest market capitalisation and exposure of the PoW coins means that investors are still more likely to choose proof of work vs proof of stake coins. The most popular PoW coins in 2021 are the following:
Bitcoin 1 BTC, Ethereum 2 ETH, Dogecoin 3 DOGE, and Litecoin 4 LTC.
PoW coins are the first cryptocurrencies to gain mainstream acceptance and have the largest market capitalisation. Being first may be profitable, which is why Bitcoin is the only crypto to have a market capitalization of a trillion dollars.
The growth of cryptocurrencies will be built on the back of PoW coins that have penetrated the market enough that we see a need to have a cryptocurrency portfolio.
However, the future PoW PoS coins remains uncertain as innovation and competition are fundamental drivers of any capitalist economy; we now live in a time where efficient use of resources is the most important aspect that investors look at because we understand that the world is a different place and we have enormous responsibilities as investors to vote with our dollars on the right practices.
Proof of work and proof of stake crypto staking
The simplest way to explain what crypto staking is would be to use a gambling analogy. In order to win when you gamble, you have to put up a stake in the forms of chips or money. It’s against this money that you either win or lose in accordance to the game you are playing.
In simplest terms, you stake your cryptocurrency through holding assets of that crypto locked in a wallet for a specified amount of time. You subsequently become a validator and a critical factor in strengthening the blockchain network.
Proof of work and proof of stake is the easiest and most profitable way of earning passive income, but it’s important that you ask yourself specific questions before making a decision on which cryptocurrency to stake.
Is your choice coin regulated?
When the platform takes the time and money required to be regulated, then you can see that it’s genuine. There are a number of regulatory bodies, but the most important are SEC, FinRA, and CySEC.
Fees
It’s essential that you understand the simplicity of the cryptocurrency staking investment which is that the lower the fees are, then the more money you make.
Support
There is a massive number of tentative investors who don’t have sufficient faith in cryptocurrency investing. Having good customer support provides us investors with the confidence that when something does go wrong, then someone will be there to answer our questions.
The better the customer support experience for investors, and potential investors then we can have confidence that the platform will deliver.
User-friendly
Cryptocurrencies are past the initial stage of early adopters but are burdened with an uneducated but investment-rich part of the population – the baby boomers – who are not yet participating at the rate they should.
The only way to give them the confidence to move their current assets from whatever portfolio to diversify towards crypto is by making the platform very user-friendly and easy to use. It’s the only way to provide investors with the answers they need in order to make the decision to invest and even be essential cogs like validators.
Multiple Payment Methods
The more payment methods you have, the cheaper the fees to deposit money. Gone are the days when platforms used only credit cards or verified PayPal accounts; now a platform must accept debit cards as well since this method is cheaper and accessible to everyone.
Proof of stake versus proof of work staking comparison
There is a sizable investment required for either blockchain. PoW requires a large amount of energy which can run into the millions. In PoS the validators will stake a certain number of coins depending on the value, but this gives power to the miner with the most coins and subsequently money.
The PoS staking lends itself to the manipulation by those with more resources in the form of money because they can play a bigger role. This will eventually defeat the entire decentralised finance ethos of cryptocurrencies. It’s particularly important to note that PoS is gaining more momentum because it has predetermined investment costs.
It allows the investor to earn truly passive income as rewards for authentic validations. The result of the reward system is that the rich get richer. The fairness of the staking method with its predetermined costs provides the best opportunity for an investor to enter the cryptocurrency space.
PoW have long been thought of as exclusive by virtue of the costs associated with mining. The sheer demands on energy exclude many countries that are already struggling with the energy demands.
The cost of mining has gone from thousands of dollars to millions in a short time, as a direct result of the ever rising costs of energy. The computing power required for PoW mining can also prove to be a barrier for most investors looking to enter the cryptocurrency space through mining.
The PoS staking method provides so many ways in which one can earn real passive income, however, there are plenty of fraud pitfalls which are a result of the misinformation in circulation about cryptocurrencies.