Proof of work vs proof of stake: What’s the difference?

Proof of work and proof of stake are the basis for virtually all cryptocurrencies that exist today. This guide covers what they are and the key differences between them.
Updated: Jan 28, 2022

This page explains the two most popular ways that a cryptocurrency can work. All cryptocurrencies are based on blockchains, and if you aren’t sure what one of those is yet then you should look over our blockchain definition first before reading on. Otherwise, scroll down to learn more about the two approaches.

What are proof of work and proof of stake?

Proof of work (PoW) and proof of stake (PoS) are how cryptocurrencies create new coins and verify transactions. The most important issue for a digital currency is the ‘double-spend problem’: how to prevent people from using the same money twice. These methods represent two different ways of solving that problem.

Fundamentally, a cryptocurrency needs to make sure that there is a single record of transactions that everyone agrees on. With normal currencies, that record is held and controlled by a bank. In cryptocurrency, there is no equivalent of a bank; instead, the transactions are stored on a decentralised blockchain.

It’s important that all users always agree that the blockchain is accurate and work from the same, up to date version. Both PoW and PoS are ways of reaching that agreement, which is known as a ‘consensus mechanism’. They both bundle transactions together into ‘blocks’ which are then verified and added to the record, but the means of verification is different.

Blockchains that use proof of work require a computer to solve a complex algorithm in order to add a new block. With proof of stake, users ‘stake’ their cryptocurrency to validate new transactions instead. In both cases, the incentives are set up so that it’s more profitable to act honestly than to try to cheat the system by adding incorrect information.

What are the differences between the two?

Proof of work is a more established system that prioritises security, while proof of stake is more democratic and consumes much less power. Many of the differences are as a result of the fact that proof of stake was deliberately created to solve the problems that are inherent in a proof of work system.

The idea of using ‘proof of work’ as a means of verification predates cryptocurrencies and it has been used by Bitcoin since its foundation in 2008. That gives it a much longer track record of success than proof of stake, but has revealed some limitations, such as the fact that there is a limit to how quickly it can add new transactions.

Proof of stake can scale up to cope with many thousands of transactions every second, whereas PoW has traditionally only been able to deal with a handful – Bitcoin can only process about 5 transactions per second. That can lead to bottlenecks at busy times, where transactions become very expensive and take a long time to process.

You also need a serious amount of hardware to solve the algorithms for a cryptocurrency like Bitcoin, which leads into the most contentious difference: energy consumption. Modern Bitcoin ‘mining’ is a large-scale project that requires access to vast data centres that demand a constant source of power. Proof of stake blockchains placing nothing like the same demands on energy.

Nor do they concentrate power into a few hands, as PoW mining can do. The fact that creating a mining centre is so expensive means that only a small number of people can afford to do it. That sort of centralisation runs counter to the ideals of cryptocurrency purists. Proof of stake counters this by allowing anyone (in theory) to validate new transactions.

Which coins use proof of work?

Bitcoin is the largest and the original cryptocurrency and it operates with a proof of work blockchain. As the miners themselves earn a reward in Bitcoin for adding new blocks, Bitcoin mining has become an extremely lucrative industry all on its own.

There are lots of other coins that use proof of work too. The best known of these are Dogecoin, Litecoin, and Dash. Ethereum, the second-largest cryptocurrency, used this system for a long time but is in the process of switching to proof of stake.

Which coins use proof of stake?

Ethereum is going to become the best known coin to use this method, although it might take a while for the switch to take place. Moving away from proof of work was always the plan for Ethereum, to address some of the inefficiencies and limitations with proof of work.

Many altcoins use proof of stake for the same reason. Altcoins come in all sorts of shapes and sizes but many of them grew up as alternatives to Ethereum and one of the ways they could differentiate themselves was by using PoS. A couple of the most popular ones, Polkadot and Cardano, were created by people originally involved in the Ethereum project.

Which is better: proof of stake or proof of work?

It really depends on what a cryptocurrency is trying to achieve. Proof of work priotises security and is more established but guzzles energy and can struggle to cope with too many transactions all at once. Proof of stake is less proven but is growing in popularity and is much more environmentally-friendly.

One of the advantages of proof of work is that it becomes more secure as the cryptocurrency becomes more popular. As it pays a reward for mining blocks, the more valuable a coin is the more people are incentivised to contribute to the mining. The more miners, the more complex the algorithms and the more secure the system.

Bitcoin, for example, is now incredibly secure. On the flip side, it’s limited in the service it can offer. Proof of stake systems, like Ethereum 2.0 and others, can support whole new ecosystems, like supply chains or financial systems, based on the blockchain because they can cope with exponentially more transactions every second.

Ultimately, the fact that they offer different solutions that cater to different needs means that there is always going to be room for both. These two systems have developed over the course of little more than a decade, since Bitcoin’s introduction, and it’s likely that many more attempts to create a consensus mechanism will crop up in the years to come.

Are there other types of blockchains?

Yes, there are a few other blockchains. At the moment, most offer subtle variations on the established theme, such as ‘delegated proof of stake’, where users vote for delegates who are then responsible to keep the network secure, or ‘delayed proof of work’, where a smaller blockchain attaches itself to a larger, more secure blockchain.

There is also a hybrid PoW/PoS chain that tries to get the best of both worlds by balancing out the weaknesses from each. There are still more as well but for now they represent a tiny minority of cryptocurrencies. Virtually all coins operate using proof of work or proof of stake.

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A quick recap of what we’ve learned

Proof of work and proof of stake are the two most popular ways to create a secure blockchain. These blockchains are the foundation for the cryptocurrencies that we’re now familiar with; most notably Bitcoin and Ethereum. 

Each method has its own unique pros and cons. Proof of work is ideal for maximum security but because it requires so much computer power it’s very inefficient. Proof of stake has more flexibility and requires far less energy to run. In the end, the best approach depends on what each cryptocurrency is trying to achieve.

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James Knight
Editor of Education
James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.