There are generally two protocols that cryptocurrencies use to operate. These are called proof of work and proof of stake. You have likely heard of crypto mining before, this is part of the proof of work model. If you’ve ever heard of staking or masternodes, then you’ll likely know that this is part of the proof of stake protocol.
Both of these methods have their own pros and cons, and in this article, we’re going to discuss the differences between them. Both of these setups will allow investors to earn additional coins by participating in the network, and which one you prefer will depend on your individual situation and the resources that are available to you.
Both of these protocols are very interesting, and if you have even a passing interest in how cryptocurrencies function, then you should take the time to explore both of them more thoroughly.
Proof of work is a method through which cryptocurrencies can reach consensus. This essentially allows for the network to be governed without intervention from any outside governing body, and it prevents people from using the network in nefarious ways for their own greed.
Every transaction must be validated by miners before it is confirmed. They do this by solving complex mathematical problems with their computers, and they are then issued a reward for doing so.
In order for the blockchain to stay on track, all of these miners must agree with each other on the proper direction of the chain. This is a built-in security feature that prevents anyone from acting in a self-serving manner. The idea is that the majority will recognize this wrongdoing and their efforts will quickly be negated by the group.
In order to mine, users need to spend a good deal of money and resources on both hardware and electricity. This is part of the security setup of POW, because it makes it very expensive for someone to control a large portion of the mining pool. That means that it’s unlikely that they could control the blockchain in any way.
The large expense involved with mining limits the ability of people to behave poorly within the ecosystem, and many people agree that this is one of the most secure means to manage the blockchain, but it is also very resource hungry.
Mining operations require an ever-growing pool of electricity. Plus, thanks to how fast technology evolves, the computer components required to mine must be constantly upgraded, and the profitability of mining operations is constantly falling. This makes POW mining a venture that is now too costly for the majority of people.
POS is a secondary consensus method. Instead of using the hashing power of PCs to validate blocks, it instead does it based on the investor’s wallet weight. The algorithm determines the “power” of a particular node based on how many coins are in that particular wallet and how long they have been there, as time adds weight as well.
This number is then pitted against the total weight of the network to decide when to offer that wallet a transaction to confirm. This gives those who hold a larger stake in that particular currency a larger portion of the rewards.
The logic behind this being that people who are greatly invested in a particular currency would not act in a way that would damage the network, as this would likely destroy the value of their investment, which would be worth far more than the price they would get for validating false transactions.
While this method is much more energy efficient than POW, and it allows for better scaling, some believe it does not do enough to disincentivize bad actors.
To that end, Ethereum has introduced Casper, their POS scheme. This protocol would actually punish people who act maliciously toward the blockchain by removing a portion of their stake if they are found to be validating bad blocks.
Everyone who wishes to stake on the Ethereum network when it goes live will need to offer a portion of their investment as collateral, those who are found to not be acting in the network’s best interest will have a tangible loss, that will offer a greater incentive to behave themselves.
This change makes the security of proof of stake more viable than it was in the past. This could allow POS to provide cryptocurrencies with the many benefits of its protocol, without the downfall of less security.
There is much debate about which of these protocols is the best. As of now, POW is arguably a safer method, but it is becoming centralized. The cost to begin mining has now gone through the roof, and many smaller miners have been pushed out. Plus, the upfront costs of mining rigs and the resources needed to run them are not advantageous to many people.
This creates a much smaller pool of validators, and it allows large-scale mining farms to eat up the hash power, causing security issues for big cryptocurrencies like Bitcoin or Ethereum.
POS has no need for massive amounts of hardware or electricity, and it also comes with a much easier learning curve. While it takes specialized knowledge to run a mining rig, none is needed to participate in a POS environment.
The only issue, of course, being that security in traditional proof of stake setups is not as high as proof of work. However, with Ethereum’s Casper protocol rolling out, we could soon see a solution to that problem.
Some are understandably worried that a POS model will completely shut out the little guy due to the cost of the initial investment. While this is an understandable concern, using proof of work doesn’t really solve this problem either.
There’s no possible way for the everyday person to mine Bitcoin. They would never find a block. Likewise, it is harder to stake coins with a smaller investment, but it’s still possible.
You just have to wait longer to do it. It also incentivizes people to hold on to their coins rather than dump them immediately upon minting. More coins mean more frequent stakes after all, wherein a mining only system, some will mine simply for income, even if they have no interest in the coin.
The truth is that what’s better for one currency may not be better for another. Fortunately, we don’t have to only have one way to do things. Cryptocurrencies are diverse, and it’s likely that both of these protocols will continue to exist side by side.
Each one will be improved upon, and in the future, it will be more clear which is the best solution. Even if a winner is crowned though, don’t expect the other to just go away.
In fact, many currencies actually use both POW and POS. Many proof of stake currencies are initially created using mining, and then POS is implemented. In some cases, they actually continue to use both methods, and this could be a very viable solution that allows as many block validators as possible to participate in these networks. A hybrid model could have many benefits and the future is not yet seen.
You can earn coins for yourself using either of these models. If you have high-end computer equipment, then you may want to look into mining some lesser known altcoins which may still have a low difficulty rating.
If you don’t have any such hardware, then you may want to instead invest in a POS currency with an attractive return. This is a much better option for enthusiasts who are not as well versed with computers and software.
The knowledge required to begin participating in proof of stake is far lower than that of proof of work. You’ll only need to acquire your coins, and then download the desktop client wallet in most cases. However, you can easily learn to participate in proof of work mining as well within an afternoon if you have your heart set on learning more about the POW process.
After establishing that your computer hardware is sufficient to mine, you’ll need to find a mineable currency with a low difficulty rating. There are many websites that can help you with this, and you’ll be able to quickly identify which algorithm and cryptocurrency will be the best for your specific hardware.
After finding a coin, you’ll need to download the mining software, and in most cases, you’ll need to find a pool to connect to. While it is possible to solo mine, it’s usually not very profitable for casual miners, and you’ll make more using a pool.
A pool is a group of miners who bundle their hash power to find blocks. You can use the pool to get more frequent payouts, and it’s generally fairly easy to get started this way.