Proof of Stake (PoS) and Proof of Work (PoW) are both consensus mechanisms used in cryptocurrency for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a process of securely validating entries in a distributed database; in the case of cryptocurrency, this database is known as the blockchain.

Below, we will detail Proof of Work and Proof of Stake, as well as the main differences between them.

Proof of Work (PoW)

PoW is a decentralized consensus mechanism. Under this mechanism, randomly selected participants in the network use computational power to solve mathematical puzzles; these puzzles validate the authenticity of new entries when they are added to the blockchain, a public distributed ledger. The most evident example of PoW is in the Bitcoin network.

In the Bitcoin network, miners use computational power to mine new coins (tokens) and create new blocks. Since the blockchain is nearly impossible for an individual to alter, cryptocurrencies that use PoW can safely conduct transactions on a peer-to-peer network without third-party oversight. Users can detect tampering through hash values, long strings of numbers that act as real PoW instance signatures.

Each created hash exists in a chain, with each hash linked to its unique numeric sequence: manually altering a hash would require altering every other hash in the chain and distributing this change across the entire peer-to-peer blockchain network.

Given current computational technology, manually altering a hash is virtually impossible, providing security for PoW. However, as the network grows in size, PoW becomes more energy-intensive.

Proof of Stake (PoS)

Under the PoS consensus mechanism, "validators" (users) verify block transactions based on how many coins (tokens) they can offer as collateral or stake. PoS reduces the computational workload needed to verify blocks and transactions, thus lowering the network's energy consumption. Recently, the Ethereum network updated its consensus mechanism from Proof of Work to Proof of Stake, an event known as “The Merge.”

In PoS, users (known as validators) are randomly selected to verify transactions and blocks on the network. Although the selection of users is random, validators who stake more tokens (coins) have a higher chance of being chosen. The reward for validators is nominal transaction fees, but this actually requires available tokens as capital for staking; for example, Ethereum users must stake at least 32 ETH to have a chance of becoming a validator. Once a validator is randomly chosen to verify a block, the random selection process is considered complete and closed. PoS is considered less susceptible to potential attacks on the network, as the reward for attacking PoS is disproportionate to the effort required. Actual PoS mechanisms may vary by cryptocurrency, but they share a common requirement: users authorizing transactions and blocks on the network stake a certain amount of tokens (coins) to be chosen as validators.

Main Differences

Based on the working principles of the two consensus mechanisms, this article lists some of the main differences between PoW and PoS.

Proof of Work (PoW)

Miners create new blocks and mine new tokens.

Users must operate computational devices to become miners.

Peer-to-peer decentralized ledgers provide robust security.

Miners receive block rewards.

Higher energy consumption as the network size increases.

Proof of Stake (PoS)

Validators create new blocks.

Users must own tokens (coins) to become validators.

Security is provided by incentivizing the community.

Validators receive transaction fees as rewards.

Moderate increase in energy consumption as the network size increases.

Conclusion

Although PoW and PoS work differently, they serve the same function: creating a peer-to-peer mechanism that allows decentralized networks to process cryptocurrency fairly and securely. Morocoin Exchange points out that both consensus mechanisms have their pros and cons, and the best mechanism depends on what you value most; it's a matter of personal preference. More importantly, you should understand how these consensus mechanisms work to make a choice that suits you best.