There are two predominant consensus models when it comes down to blockchain technology. Proof of work was the first one in history and proof of stake followed a little bit later. How do they work and what kind of advantages do they offer?
Proof of Work
Proof of work or PoW relies on the hashing power of miners. Meaning that miners compete with each other and get rewarded if they manage to be the first to solve a computational puzzle that has to be solved for each block.
There are two advantages. First, the blockchain cannot become a target for denial of service attacks. Second, this way each block is verified and cannot be manipulated or altered. Since each block contains a record of transactions all network participants can rest assured that their crypto assets are secured.
The downside to this system is a vast consumption of energy and computer hardware. Since miners are competing for rewards they have a strong incentive to use all resources available to them.
Proof of Stake
Proof of stake or PoS offers a very different approach to PoW. Each block is verified by stakeholders who guarantee that the transactions are valid. The basic idea is that a stakeholder has no incentive to vouch for a malicious or manipulated transaction because he would hurt his own investment.
One of the biggest advantages is the fact that PoS is not using that much resources as PoW. Since the nodes require only little power consumption compared to the miners. While being considered greener, it also has a slight disadvantage.
Usually the biggest stakeholder has a higher chance to confirm a block. This reflects the fact that he is most interested to vouch for valid transactions. Otherwise he would hurt himself badly. But that also means that the richest stakeholder is becoming more and more richer over time, because he gets the block reward more often than anybody else.
So, the problem is that PoS perpetuates economical differences between network participants in a very harsh way.
You can’t have one without the other
Both consensus algorithms are working and producing valid and immutable public blockchains. While many people believe that the original PoW model builds trust in the most effective way, others are believing to build an alternative.
Both are working, but in each case one has to live with the fact that they also have a downside.