Many people may have heard that Ethereum is considering changing to Proof of Stake (PoS) validation methods. You may have also read or heard criticism about Bitcoin because it uses a Proof of Work (PoW) validation method, which uses a large amount of electricity. This, some critics have said, is not sustainable. With all this news you may be wondering what are Proof of Stake and Proof of Work.
Proof of Work and Proof of Stake are protocols that were designed to provide a maximum amount of security against cyberattacks like, distributed denial of service attacks, or DDoS attacks. The protocols ensure security by providing a trustless system of transaction and validation through consensus. What this means is that they remove the need for trusted third parties to conduct transactions.
One of the simplest ways to think of this is with transferring funds or money. When person A wants to send money to person B, they will need a third party to facilitate the transaction. In most cases, a bank will conduct the transaction by debiting funds from the sender’s account, and then crediting funds to the receivers account. With some wires, a person may need to go to a wire company and provide cash or some form of payment. The recipient will then need to provide the wire service at another location with ID in order to prove they are the true recipient, and have the wire service provide them their funds. With PoW and PoS, there is no need for a third party. Now, let’s explain how this works for each protocol.
The simplest way to explain Proof of Work is to use a puzzle as an example. Miners on the network compete to be the first to solve a puzzle and receive a reward. The miner who solves the puzzle first creates a new block on the network. This block is where new transaction data is stored for validation. The miner’s work for the network is proven by the creation of a new block. Their reward is a payment usually in some digital asset. For the Bitcoin community miners receive newly created Bitcoins. This is how new coins are created on the Bitcoin network, and the reward or payment is governed by the rules of the protocol. Take note that all the miners who did not solve the puzzle first have wasted energy. This is why this method is seen as unsustainable.
With Proof of Stake, there are no miners competing to be the first to solve a puzzle. Instead, there are validators who put up a stake of assets, like Bitcoins or whatever else their network protocol requires, and then they are randomly selected based on an algorithm unique to their network protocol and the stake provided. Once a validator is selected, no other computer or participant can create a block. In addition, the validator is no longer trying to solve a puzzle to create a block, but instead they are simply validating the transactions within the block. With no other computers working and competing, this utilizes less energy consumption or electricity. Hence why Proof of Stake is gaining ground and being seen as more sustainable.
This is a simple breakdown of Proof of Work versus Proof of Stake and you may still have questions, especially about security. Rest assured though many participants are helping improve all these methods. For instance, to improve security, the Casper Protocol has been created to ensure participants act according to protocol.