What is a \"proof of workload\" or \"proof of interest\"?

Decentralized cryptocurrency networks need to ensure that no one spends the same money twice without a central authority like Visa or PayPal. To achieve this goal, the network uses something called a \"consensus mechanism,\" a system that allows all computers in the encrypted network to agree on which transactions are legal.

Most cryptocurrencies today use two main consensus mechanisms. Proof of work is the older of the two, used by Bitcoin, Ethereum 1.0 and many other products. The newer consensus mechanism, called proof of stake, powers Ethereum 2.0, Cardano, Tezos and other (often newer) cryptocurrencies. To understand proof of stake, it is helpful to first understand proof of work, so we pair them in this interpreter.

What is a proof of work?

Proof-of-work is the original cryptographic consensus mechanism and was first used by Bitcoin. Proof-of-work and mining are closely related ideas. It is called a \"proof of work\" because the network requires a lot of processing power. The proof-of-work blockchain is protected and verified by virtual miners around the world, racing to become the first to solve mathematical problems. Winners can update the blockchain with the latest verified transactions and receive a predetermined amount of cryptocurrency rewards from the network.

Proof-of-work has some powerful advantages, especially for relatively simple but valuable cryptocurrencies like Bitcoin (learn more about how Bitcoin works). This is a proven and powerful way to maintain a secure decentralized blockchain. As cryptocurrencies grow in value, more miners are motivated to join the network, increasing its power and security. Due to the large processing power involved, no individual or group can interfere with the blockchain of valuable cryptocurrencies.

On the other hand, this is an energy-intensive process that may be difficult to scale to accommodate the large number of transactions that smart contract-compatible blockchains such as Ethereum can generate. As a result, alternatives have been developed, the most popular of which is called proof of stake.

What is proof of stake?

Ethereum developers understood from the beginning that proof of work would impose scalability limitations that ultimately needed to be overcome-in fact, with the popularity of the Ethereum-driven decentralized finance (or DeFi) protocol, blockchain has been trying to keep up, causing fees to soar.

While the Bitcoin blockchain mainly only needs to process incoming and outgoing Bitcoin transactions, like a huge checkbook, Ethereum\'s blockchain also has to handle a large number of DeFi transactions, stablecoin smart contracts, NFT minting and sales, and any future innovations that developers propose.

Their solution is to build a new ETH2 blockchain-which started rolling out in December 2020 and is expected to be completed in 2022. An upgraded version of Ethereum will feature a faster, less resource-intensive consensus mechanism called proof of stake. Cryptocurrencies including Cardano, Tezos and Atmos all use a proof-of-stake consensus mechanism with the goal of maximizing speed and efficiency while reducing costs.

In a proof-of-stake system, the function of pledge is similar to proof of work mining, as it is the process of selecting network participants to add the latest batch of transactions to the blockchain and earn some cryptocurrency in exchange.

Details vary by project, but in general, the proof-of-stake blockchain uses a network of \"validators\" who contribute (or \"pledge\") their own cryptocurrency in exchange for verifying new transactions, updating the blockchain, and receiving rewards.

The network selects winners based on the amount of cryptocurrency each verifier has in the pool and the length of time they have had cryptocurrency there-actually rewarding the participant who invests the most.

Once the winner verifies the latest transaction block, other verifiers can prove that the block is accurate. When the threshold number of certificates reaches, the network updates the blockchain.

All participating verifiers will receive a reward in native cryptocurrency, which is usually distributed by the network based on each verifier\'s share.

Becoming a validator is a major responsibility and requires a fairly high level of technical knowledge. The minimum amount of cryptocurrency that a validator needs to pledge is usually relatively high (e.g., for ETH2, it\'s 32 ETH), and if the validator node goes offline or verifies a \"bad\" transaction block, the validator may lose some of its stake through a process known as forfeiture. [TAG

But even if that sounds too much responsibility, you can still participate in pledge by joining a pledge pool run by someone else and get rewards for cryptocurrencies that would otherwise be idle. This process is often referred to as delegation, and Coinbase Exchange provides tools to make it simple and seamless.

What is the difference between proof of workload and proof of stake?

Energy consumption is a major difference between the two consensus mechanisms. Because the proof-of-stake blockchain does not require miners to spend power on duplicate processes (competing to solve the same problem), the proof-of-stake allows the network to operate with significantly reduced resource consumption.

Both consensus mechanisms have economic consequences, punishing network outages and deterring malicious actors. In proof-of-work, the penalty for miners submitting invalid information or blocks is the sunk cost of computing power, energy, and time. In proof of stake, the crypto funds pledged by the verifier can serve as a financial incentive to act in the best interests of the network. If verifiers accept bad blocks, part of their pledged funds will be \"cut\" as a penalty. The number of verifiers that can be confiscated depends on the network.