Modern cryptocurrencies run on blockchains, distributed open ledgers made from blocks of transaction data. Crypto funds are secure because the data blocks containing transaction data are cryptographically validated. Validation ensures that the information added to the blockchain is valid and that previous blocks have not been altered.
The validation techniques for blockchain data are known as consensus mechanisms because they require the consensus of a group of nodes to validate the data and add it to the blockchain.
Proof of Work
The Bitcoin blockchain that kicked off the cryptocurrency revolution uses a consensus mechanism called Proof of Work.
Proof of Work requires the computers at validating nodes to compete to solve a difficult cryptographic decoding problem. The winning node earns some cryptocurrency and the new data block is copied to all the other nodes on the network.
The Proof of Work consensus mechanism has proved slow, so it is a bottleneck for approving transactions and supporting the growth of cryptocurrencies. It also consumes an infamously large amount of electricity as nodes perform complex calculations to verify data.
Proof of Stake
With Proof of Stake, consensus is achieved among nodes that have staked large sums of the blockchain’s native currency in a smart contract that freezes the funds. Crypto owners stake the funds in order to earn transaction fees. Each staked coin is like a lottery ticket. The more coins a node has staked, the higher the odds it will earn the transaction fees for the block. The more you stake, the more you earn.
Both consensus methods use cryptography to verify the integrity of transactions and post them in chronological order to the blockchain, but Proof of Stake blockchains validate transactions faster and consume considerably less electricity.
This text is informative in nature and should not be considered an investment recommendation. It does not express the personal opinion of the author or service. Any investment or trading is risky, and past returns are not a guarantee of future returns. Risk only assets that you are willing to lose.