Proof of Work vs. Proof of Stake vs. Hybrid: Explained

Proof of Work (PoW)

  • Proof of work is used widely in cryptocurrency mining, for validating transactions and mining new tokens
  • New transactions are grouped together in a “block” and requires a computer to validate that transaction
  • The block is encrypted with a hashing algorithm which is essentially a random key
  • The first computer that guesses the answer correctly allows that computer to process the block and gain the rewards
  • Therefore, the person with the most computing power that can generate the most guesses will have higher probability of winning the block
  • Most notable crypto currency using proof of work today is Bitcoin and Ethereum  

Proof of Stake (PoS)

  • Instead of solving a hashing algorithm, proof of stake allows any owner of the crypto currency to validate transactions
  • Proof of stake gives mining power based on the number of coins held vs. how much computing power they have
  • Therefore, it does not require the capital investment of a “mining rig” with huge amount of computing power to become a validator

Proof of Work vs. Proof of Stake:

  • PoS is essentially the same as PoW except without the energy cost
  • As cryptocurrencies with PoW gets more popular, the difficulty to mine the next additional block gets more difficult and therefore it takes more energy to “mine” that coin
  • PoS is about ownership and owners of the network is less likely to “hack” the network since owners have vested interest in the value of the currency

Hybrid Models

  • Hybrid Proof of Work/Proof of Stake consensus mechanisms utilize elements of both PoW and PoS models when determining transaction validation rights. In doing so, they aim to mitigate the respective weaknesses of each
  • A hybrid model might split the validators between PoW miners and PoS holders
  • Such systems aim to defend themselves from a 51% attack by implementing PoS voting as an additional, independent layer of verification

My Thoughts on the Future

  • Large market cap crypto currencies will shift towards 100% proof of stake since its both unlikely that any group of entity can accumulate hundreds of trillions of dollars
  • Medium and small market cap cryptos will shift towards hybrid models as global warming and energy consumption is in the media’s spotlight
  • However, the validators will be disproportionate with more rewards going to crypto stakers vs. miners

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Hi! I'm

Ricky Young

My belief is that financial freedom cannot be obtained by just a 9-to-5, but a combination of smart investing and passive income. This is my journey to achieve financial freedom.

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