Cryptocurrencies work in two primary ways. These are called Proof-of-Work and Proof-of-Stake. Both of these are a type of consensus mechanism and help blockchains synchronise data while staying secure.
The Proof-of-Work consensus mechanism enables participants to validate changes made in a given network by using computational power. Each network consists of a continuous chain of data blocks. The data of any given transaction is recorded on these blocks. With each new entry, the chain of blocks becomes longer – hence the name blockchain.
This consensus mechanism is still used by many cryptocurrencies as Proof-of-Work allows validating transactions, as well as mining new tokens. The mining process requires users to dedicate specialised hardware that validates transactions commonly known as mining. These users are then rewarded with varying quantities of the corresponding cryptocurrency. The Proof-of-Work system protects users from double-spending and ensures that a blockchain is hard to attack and manipulate from outside by requiring vast computational resources in order to validate transactions.
Additionally, it is the basic algorithm that decides the difficulty and rules for the job miners do. Proof-of-Work has stood the test of time as a reliable and secure consensus mechanism. However, it has received criticism for its high energy consumption. This has resulted in extensive research that aims to make blockchain more energy-efficient and have less of an impact on the environment.
This is why Proof-of-Stake is becoming increasingly popular and widely adopted. Its efficient use of energy and independence from expensive computational hardware makes it an alluring choice. Proof-of-Stake does not allow mining of cryptocurrency, although it still allows an individual to be a validator who contributes to the security of a network. A person is still able to receive rewards by using a cryptocurrency client that takes part in Proof-of-Stake validation. It also allows network validators to agree on a single true data history record. Furthermore, Proof-of-Stake has validators and uses stacks of coins to validate blocks into existence, unlike Proof-of-Work which has miners that mint new blocks using computers and complex machinery.
Despite being efficient in its energy use, Proof-of-Stake also has its own share of drawbacks. The most prominent among these is the system’s preference for wealthy users (more blocks will be validated as you stake more). Another is the possibility of block validators using high amounts of power when having fewer validators. In Proof-of-Stake, coins are not available for trade on other blockchains because coins are kept staked and locked into a smart contract, which is comparable to locking cash up in a time-sealed vault.
In conclusion, both consensus mechanisms have their own pros and cons. While there may be a positive outlook on the adoption of Proof-of-Stake, it remains a more complicated system than Proof-of-Work and provides leverage to holders with bigger volumes of that currency.