Proof of Stake vs. Proof of Work: Understanding the Differences

By Kosala Hemachandra

With the Ethereum merge, users and hobbyists are watching closely to see how this milestone change will impact the second most popular blockchain. From the price of ETH, usability of decentralized applications, and communities of NFTs—there is a lot at stake as Ethreum switches from proof of work (PoW) to proof of stake (PoS). 

What is the Ethereum Merge?

The process of validating transactions on Ethereum shifts from what’s known as proof of work to proof of stake. “The merge,” as it’s being called, will cut carbon emissions of running the blockchain, while creating more opportunity for wider adoption by users and developers through increased interest in the blockchain. As ETH continues to hold the second highest market cap of all cryptocurrencies, understanding the pros and cons of proof of stake is important.

What is Proof of Work?

Think about it like this: proof of work is how the computers that make up a blockchain network communicate and agree on how to process transactions. Proof of work is the algorithm used by cryptocurrencies to reach agreement from computer-to-computer. It demands that the miner who created the new block provides proof that they did so by solving some computational puzzle.

What is Proof of Stake?

Proof of stake is a blockchain consensus algorithm where the creator of the next block is chosen, based on the amount of tokens held by that user, also known as their stake. Think of it as one coin equals one vote.

Proof of stake changes the way blocks are verified using the machines of coin owners. The owners offer their coins as collateral for the chance to validate blocks. Coin owners with staked coins become "validators,” that can help validate to ensure the security of each transaction.

Validators through proof of stake will be randomly selected after they have staked a specific amount of coins to be eligible. For instance, Ethereum will require 32 ETH to be staked before a user can become a validator.

Do the Differences Really Matter?

The everyday user sees much smaller impact from the differences between PoW or PoS, because they both aim to create a way for token holders to participate in the validation of the blockchain. The main difference between proof of stake and proof of work is in how they select who creates blocks and validate transactions. 

Choosing the right mechanism varies blockchain-to-blockchain. For a blockchain like Ethereum, proof of stake is a chance to enhance the overall experience for more users to engage and trust blockchain technology is secure and stable for the long-term. The change to PoS even offers opportunities for retail users without access to 32 ETH to participate in meaningful ways. 

Proof of stake and proof of work both have pros and cons, and it's important to acknowledge that no system is perfect. There’s a whole ecosystem of multi-chain solutions in blockchain to meet the needs of every community. After all, crypto is not a one-stake-fits-all environment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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