How Blockchains Process Crypto Transactions: Proof of Work (PoW) vs Proof of Stake (PoS)

Each blockchain needs a secure consensus-based way to add blocks of transactions to the chain. The two most popular methods of block verification are Proof of Work (PoW) and Proof of Stake (PoS). Let’s consider these two alternative methods in detail.

What Is Proof of Work?

PoW is a block verification method originally introduced by the Bitcoin platform, the world’s first blockchain. Under PoW, network validators, known as miners, verify transaction blocks by trying to solve a complex computational puzzle. Miner nodes race to solve the puzzle using the hash power of their computers.
This is a competitive race where thousands of miner nodes are trying to be the first to find the answer to the puzzle. Solving this puzzle is largely a matter of randomly finding some small number called a nonce (a number used once). The more powerful the computer you have, the higher your chance of finding the nonce is.
On the Bitcoin platform, each block is verified every ten minutes. Thus, every ten minutes, the computational race produces a winner - the miner who managed to find the nonce first and add the next block of transactions to the blockchain. As soon as the block is found, the 10-minute race restarts.
PoW is designed not so much for the careful verification of transaction validity (this is done by all full network nodes on a continual basis anyway), but rather to make miners expend a large amount of computing hash power to add the next block to the chain. In other words, miner nodes have put in significant work to verify the block, hence the name – Proof of Work.
The key idea behind PoW is to prevent spam transactions and make network takeovers extremely hard since any malicious actor or actors would require massive amounts of computing power to orchestrate and stage the takeover.

What Is Proof of Stake?

The PoW block validation method worked fine during the initial years of Bitcoin, when the platform was not as popular as it is today. However, as Bitcoin grew larger, it became obvious that PoW suffers from a number of drawbacks, among which the two key ones were:
1. PoW was slow and could not handle a large number of transactions per second or minute. For example, Bitcoin has the capacity to handle no more than 7 transactions per second. Contrast it with Visa’s capacity for over 20,000 transactions per second or PayPal’s ability to handle nearly 200 transactions per second.
2. PoW required massive amounts of energy to support block mining operations. By late 2017, Bitcoin was consuming an estimated nearly 30 terawatt hours of energy per annum, more than the majority of countries on the globe at that time. Clearly, PoW was not the most energy-efficient or green solution.
When these problems with PoW became too obvious to ignore, many in the blockchain community turned their sights to an alternative block validation method – PoS.
In PoS-based blockchains, validator nodes receive the opportunity to process a block of transactions and add it to the chain based on the amount of cryptocurrency they hold on the platform. Each PoS blockchain may have its own rules for block assignment to validators.
In the most standard implementation of PoS, the probability of a node receiving the right to validate a block corresponds to the share of the total crypto funds on the platform held by the node. For example, if you hold 1% of all the cryptocurrency on the platform, you will have a 1% chance of getting an opportunity to validate the next block.
There is no competitive race in the PoS validation model. Every selected node gets the exclusive right to validate the block that falls into its laps through the random assignment algorithm. The validator nodes are motivated to abide by the rules and not approve fraudulent transactions by the system of rewards and punishments.
When validators approve a block, the information is broadcast through the network. Any inconsistent or fraudulent transactions will be quickly picked up by other network participants. If the validator is caught in the naughty act of approving the wrong block, their node will be "slashed" on the network.
Slashing on PoS platforms simply means getting a virtual flogging for being a dishonest or careless validator. Each PoS platform may have its own rules for slashing. In most cases, slashed nodes lose some crypto funds and often get thrown off the platform.
The PoS validation method was a massive improvement over the older PoW system. It solved the key problems associated with PoW:
1. Transaction processing became much faster, helping PoS platforms become much more scalable than PoW chains. For example, the Ethereum blockchain, which migrated from the PoW to the PoS model in September 2022, can now theoretically process up to 100,000 transactions per second.
2. Energy consumption requirements to run a blockchain declined massively. PoS chains require 1/100 or less energy than typical PoW chains.
3. Transaction validation became possible with a medium-spec computer, whereas PoW requires powerful specialized machines.

With all these advantages, it is likely that PoS will be the preferred block validation model in the future. Very tellingly, Ethereum, the world’s second-largest blockchain, has now moved from PoW to PoS validation. The largest PoW chains as of now are Bitcoin and Dogecoin (DOGE). The vast majority of the leading blockchain platforms are all PoS. All eyes are now on Bitcoin. The multibillion-dollar question is whether any move to the PoS validation model is envisioned or even realistic for the world’s largest and oldest blockchain network.