Proof of Work vs. Proof of Stake
Last updated
Last updated
With any cryptocurrency, one of the main defining features is how they reach an agreement or come to a "consensus" on what should be added to the blockchain. If you have gotten this page you've likely run into certain terms used in the crypto space such as proof of work and proof of stake. Both of these are considered consensus mechanisms and it helps to understand some basics of how they work before we get into staking.
Bitcoin is a good example of POW. This mechanism requires participants to show proof of performing some task (usually by solving complex nonsensical mathematical equations) which allows them the right to add transactions to the blockchain.
A drawback of POW is that it usually requires a large amount of energy and computing power making it less environmentally friendly.
Most average people are unable to participate in POW networks as usually these blockchains result in a arms race of sorts where those participating keep buying and making more and more expensive equipment to mine coins. Bitcoin is a good example of this again where currently the average joe has no hope of mintnig a block with his home PC. There are of course exceptions to this with certain blockchains having developed POW protocols that are resistant to specialized mining equipment like ASIC miners.
POS is unique in that instead of making participants do menial tasks a complex algorithm randomly assigns a participant the right to add information to the blockchain. Participants' probability is proportionate to the amount of stake delegated to them by the rest of the participants on the chain.
Cardano uses a unique proof of stake protocol named Ouroboros.
Think of each coin giving you a vote to allocate to a stake pool that you trust. The more votes a stake pool receives the more likely it is to be selected to "mint" a block and add onto the blockchain. This way stake pools that are trustworthy are rewarded while those that are untrustworthy lose stake and are less likely to be selected by the protocol to mint a block. This way each pool is motivated to keep their delegates happy by being honest and not do anything shady.
One drawback of POS is it sometimes encourages people to hoard coins. Some POS protocols actually lock your coins in place and penalizes you for moving your coins before the locking period is over.
Cardano is unique compared to other proof of stake protocols in that your Ada is never locked up and can move freely without penalty.
