Decentralized cryptocurrency networks do not have a "central authority" to govern the authenticity of transactions made on the network. So, to ensure that no one spends the same money twice, the Defi network has protocols in place, which is a system that allows all the computers connected within the network to decide on the legitimacy of the transaction.
Two major protocols are widely adopted in the crypto community to decide if a transaction is legit. One is the original "Proof-of-work" (PoW) concept, and the other is a newer alternative called "Proof-of-stake" (PoS).
Bitcoin and Ethereum have traditionally been using the proof-of-work concept, but recently there has been a shift in using the more efficient proof-of-stake mechanism. Newer crypto coins like Solana already use the proof-of-stake protocol, with Ethereum announcing switching to PoS by the end of 2022.
So, what is it that prompts the shift from proof-of-work to proof-of-stake? And is the newer proof-of-stake really better? Let's find out in our full guide.
What is proof-of-work (PoW)
PoW is the original crypto consensus protocol which is most widely adopted and is used by Bitcoin and other major crypto coins. PoW requires everyone within the network to agree with a transaction and solve complex mathematical equations, which is also known as mining. The first to complete these transactions get to update the blockchain and are rewarded for their service with a crypto coin.
There are several advantages of the PoW consensus protocol. It is extremely secure and allows the decentralized network to flourish without an intermediary body supervising every transaction. And as the price of the crypto increases, the rewards are worth more, attracting more people to the network.
However, proof-of-work has one major drawback. Because of the huge computational resources required to solve the equations, PoW is extremely energy hungry. In a world where energy is so scarce, a protocol that is inefficient and needs so much energy is certainly not ideal.
What is proof-of-stake (PoS)
To address this issue, a new consensus protocol called proof-of-stake (PoS) was developed. It was largely pioneered by Ethereum's developers, who understood that the traditional proof-of-work protocol had bottlenecked Ethereum's progress. Unlike Bitcoin, Ethereum has a variety of use cases, like Defi transactions, stablecoin, NFT minting, and any new innovations that come up in the future. So a new solution is built on an entirely new ETH2 blockchain, which is much faster, less resource hungry requires significantly less energy, and is called proof-of-stake (PoS).
PoS started rolling out in December 2020, and many crypto coins like Cardano, Tezos, and Solana are already using the proof-of-stake consensus mechanisms. But the biggest impact is expected to occur when Ethereum, the second largest crypto coin in the world, shifts from proof-of-work to proof-of-stake, which is scheduled to take place by the end of this year.
How are proof-of-work (PoW) and proof-of-stake (PoS) different
The main difference between the consensus is their approach to validating each transaction. In proof-of-work, there is competition among miners to solve the cryptographic equation and validate the transaction to scoop up the rewards. The efforts of other miners who could not solve the equation in time will go to waste.
On the other hand, proof-of-stake eliminates this competition and implements randomly chosen validators to ensure the transaction is reliable, compensating them in crypto as rewards. Therefore, proof-of-stake takes significantly less resources and energy when compared to proof-of-work.
How will the shift impact mining
The transition from proof-of-work to proof-of-stake is expected to have a massive global impact. As we already mentioned, proof-of-stake is significantly more energy efficient and promises to decrease energy consumption by 99% when compared to proof-of-work.
PoS also eliminates the competition among miners as it randomly nominates a node for validating the transaction. This makes for a quicker and faster verification process compared to the proof-of-work mechanism.
The shift from proof-of-work to proof-of-stake is much anticipated, and after many delays, we are all set to adopt proof-of-stake as a mainstream consensus protocol with Ethereum completing the transitions. The shift to Proof-of-stake will revamp the crypto industry by significantly lowering its energy consumption and fees. But even with all its merits, it will be interesting to see if proof-of-stake is widely adopted in the industry.