Proof of Work vs. Proof of Stake in Crypto Investing: Here’s What to Know
Cardano (ADA) and Bitcoin (BTC) are two cryptocurrencies that Chief Crypto Strategist Nick Black believes should be in every portfolio. This you know.
But what you may not have realized is that these two cryptos use entirely different mechanisms to validate new transactions, add them to the blockchain, and generate new tokens.
Cardano uses a proof-of-stake (PoS) platform that provides immense security and sustainability.
Bitcoin, on the other hand, uses proof-of-work (PoW) – and understanding the differences between these two mechanisms is fundamental to your success as a crypto investor.
You were smart enough to join American Institute for Crypto Investors, so you’re already one step ahead.
And today, you’re getting an even bigger advantage.
Because we’re breaking down everything you need to know about proof of work and proof of stake so you can have a better understanding of the cryptos you’re investing in and, ultimately, make even more money…
Proof of Work and Proof of Stake Explained
Proof of work (PoW) and proof of stake (PoS) are the mechanisms that allow cryptocurrencies to operate apart from banks and brokers to verify transactions.
And although PoW and PoS are equally used in crypto, they are entirely different in how they operate.
Proof of work, first pioneered by Bitcoin and built on by Ethereum (ETH), uses mining to validate new transactions, add them to the blockchain, and generate new tokens.
Proof of stake, which is employed by the rest of the cryptos in Nick’s starter portfolio – Cardano, Polkadot (DOT), Cosmos (ATOM), and Fetch (FET) – uses staking to achieve the same things.
Proof of work has some very strong benefits, specifically for a relatively simple but hugely beneficial cryptocurrency like Bitcoin.
It is a verified, strong method of keeping a safe decentralized blockchain. As the benefit of a cryptocurrency expands, more miners are encouraged to join the network, expanding its power and security.
As a result of the amount of processing power involved, it becomes unrealistic for any individual or group to interfere with a significant cryptocurrency’s blockchain.
At its core, proof of work is used to determine how the blockchain reaches consensus.
In a proof of stake system, staking supports a similar role to proof of work’s mining; it’s the method by which a system participant gets chosen to include the most recent batch of transactions to the blockchain and earn some crypto in exchange.
The specific details fluctuate by project, but by and large, proof-of-stake blockchains utilize a network of “validators” who provide – or “stake” – their own crypto in return for an opportunity of getting to confirm new transactions, refresh the blockchain, and make a reward.
Becoming a validator is a major responsibility and requires a high level of technical knowledge.
For example, Cardano just recently had an upgrade that integrated the Ouroboros protocol – allowing Cardano holders to take part in staking ADA and earn staking rewards.
Ouroboros is exceptional due to its fusion of PoS and Nakamoto-style agreement and focus on strict verified security. The result is a sound and confident PoS protocol that is guarded against a broad spectrum of attacks. The Cardano staking process is then used to select validators who validate new blocks and add them to the Cardano blockchain.
One of the key differences between PoW and PoS is that in PoW, the punishment for miners submitting false information, or blocks, is the immersed cost of computing power, energy, and time.
In PoS, the validators’ staked crypto funds assist as a financial stimulus to perform in the network’s best interests.
Understanding these fundamentals is key to your success as a crypto investor.
Now, to learn more about how to stake Cardano and earn rewards on your crypto, make sure you check out this guide from advisory board member David Zeiler.
The American Institute for Crypto Investors Research Team