by Justin Caccappolo

Proof-of-Work

Proof-of-Work, via Mining, was the first consensus algorithm created and popularized by Satoshi Nakamoto in 2008 through the Bitcoin Whitepaper. Different from Proof-of-Stake, Proof-of-Work is a decentralized consensus mechanism that requires a majority of members within a network to compute solutions to solve a randomized mathematical puzzle. The computation to solve these puzzles is utilized to enforce the rules of the network. Now that we have a concept of Proof-of-Work, we can understand the relationship between Miners and Digital Assets. Miners lend computational power to validate transactions to a Proof-of-Work network and are rewarded with the Asset they validate. Proof-of-Work is an economic mechanism that ensures the blockchain’s success by incentivizing good behavior that keeps the network stable and secure. Recent popularity in Digital Assets has sparked many discussions around the environmental impact of Proof-of-Work blockchains. As Proof-of-Work blockchains, mostly Bitcoin, use a large amount of computational power to secure their network. The more energy used directly correlates with network security. Developers in this space had come up with creative ways to use less energy but still secure a decentralized network through an incentivized system.

(Environmentally Friendly Volcano-Powered Mining, Source: Venezuela’s Prime Minister @Nayibbukele)

Proof-of-Stake

Proof-of-Stake, via Staking, was developed as an eco-friendly, less resource intensive alternative to Proof-of-Work blockchains such as Bitcoin. Staking provides a method of reaching distributed consensus and validation on the blockchain network similar to Proof-of-Work. In practice, a holder locks their digital assets in a digital wallet, which in turn rewards passive income in the form of additional crypto. Locking or securing these assets to a Proof-of-Stake network such as Ethereum does not require the holder to buy expensive hardware, use a lot of electricity, or compute complex mathematical problem. A user simply stakes the asset with a validator of the protocol and helps confirm transactions for the blockchain. If a user attempts to go against the algorithm’s ruleset, their staked assets will be taken from their validator and they will lose their staked assets. This incentives healthy behavior for stakers. Proof-of-Stake consensus allows regular crypto owners to assist in strengthening and maintaining the blockchain with minimum preparation.

Cryptocurrencies

Below are some popular cryptocurrencies; the following table indicates whether a cryptocurrency uses Proof-of-Stake or Proof-of-Work:

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CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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