“The Differences Between Proof-of-Work and Proof-of-Stake”

 

Alex Mashinsky, the founder and chief executive of the crypto lending platform, Celsius Network, recently announced a change concerning Dogecoin. He speculates that it will transition from a proof-of-work (PoW) protocol to proof-of-stake (PoS) within the next two years. Switching protocols means different features and abilities for the system.

 

For those who are not particularly savvy to these protocols, you may be wondering what makes them distinct from one another. On top of that, you want some context for this lending platform’s potential transition.

 

Proof-of-Work

 

Proof-of-work refers to a system that needs an insignificant yet feasible amount of effort to avert any malicious or trivial uses of computing power. Examples include sending spam emails or launching various attacks, like denial-of-service (DoS). PoW creates the basis of Bitcoin, as well as many other cryptocurrencies, which enables a consensus that is secure and decentralized.

 

The best way to look at PoW is by seeing how it functions in relation to the Bitcoin network. This cryptocurrency is underpinned by blockchain technology, which is a distributed ledger that contains a record of all bitcoin transactions. They are arranged in sequential “blocks,” hence the name “blockchain.” This way, users are unable to spend any of their holdings more than once. Prevention of tampering requires the ledger to be public, or “distributed.” An altered version will face rejection by other users.

 

Users detect any kind of tampering with hashes, which are long strings of numbers serving as PoW. When a given set of data is put through a hash function (SHA-256 is what Bitcoin uses), it will only produce one hash. However, the “avalanche effect” makes it so that even the smallest change to the original data will create a completely unrecognizable hash.

 

Proof-of-Stake

 

According to the proof-of-stake concept, a person can mine or validate block transactions based on the number of coins they hold. This means that the more coins a miner owns, the more mining power they possess.

 

The PoS is an alternative to PoW that aims to tackle inherent issues with the latter. Altcoins primarily use the PoS concept. As soon as a transaction is initiated, the data is fitted into a block with a 1-megabyte capacity before being duplicated across numerous computers or nodes on the network. The nodes are the blockchain’s administrative body and corroborate the legitimacy of each blocks’ transactions.

 

A large amount of computing power is required for mining to properly operate on different cryptographic calculations. With it, different computational challenges can be unlocked. The computing power translates into an abundance of electricity and power that is essential for the PoW. PoS addresses this by applying mining power to the proportion of coins that the miner is holding. Therefore, rather than utilize energy as a means to solve PoW puzzles, a PoS miner is limited to mining a certain percentage of transactions reflective of their ownership stake.