Vitalik Buterin Talks Proof of Work and Proof of Stake. Which is Better?

The world of cryptocurrency is nothing if not overstuffed with complex jargon. Merkel trees, Byzantine fault tolerance, interplanetary file systems…what does it all mean?!

We’ll leave you to muddle over those particular technical terms (all real, by the way), in order to cover two much more simple and useful to the everyday blockchain enthusiast: “Proof of Work” and “Proof of Stake”. The former is significant because it’s the security and consensus mechanism Bitcoin and Ethereum use. The latter is important, because it’s the security and consensus mechanism Ethereum will use in the future, as Vitalik Buterin recently explained.

Proof of Work and Proof of Stake

“Ethereum Cryptocurrency & Decentralized Security” – Descryptive.com via Flickr (CC BY-SA 2.0)

Proof of Work is the way older blockchains like Bitcoin and Ethereum ensure that all transactions on their networks are accurate and authentic. Miners all around the world look at every transaction record as it enters the blockchain. They determine if the people sending the transactions have the money (BTC or ETH) necessary to complete the transactions, and that the coins end up in the right place.

Making this determination requires powerful computers to operate at full capacity, using up plenty of electricity in the process. Miners also store this information in data “blocks”, which get added to the “blockchain”. Every new block protects each block before it. Even more electricity is required to do this step.

All told, this is a very secure method, but it takes up immense resources. It is theorised that if Bitcoin became a true global currency, it would require more electricity than is used in the world’s entire financial system today. Ethereum works the same way. This is Proof of Work: effective, but costly.

Proof of Stake is a little different. Instead of requiring computers to run complex mathematical problems for block inclusion, “stakeholders” (those who buy and hold Ether coins) get to manually vote on which blocks to add to the chain. This is much less labour intensive, from an electricity standpoint, and for this reason much more sustainable moving forward.

Ethereum is preparing to make this change, from Proof of Work to Proof of Stake, in the coming year. It hopes to become faster, and more forward-compatible, than Bitcoin and many of its other Proof of Work competitors. Other blockchains like EOS and ARK have used variations on Proof of Stake for years now, and it has been shown to be a real success in some cases. In any event, Ethereum is moving ahead, and when they finally make the change, it could move Ethereum to the pinnacle of the market.

*Information in this article should not be taken as investment advice

Featured image: “Vitalik Buterin Asks Cryptocurrency Community Seven Difficult and Reflective Questions” – Pavlos Giorkas via Flickr (CC BY-SA 2.0)