The world of blockchain, cryptocurrencies, and decentralized finance can, at first glance, appear complex, with many specific terms being employed to describe specific processes. But the basic underlying concepts, when properly understood, are actually quite simple.
One perennial point of confusion is rooted in the question of how, exactly, cryptocurrencies attain real world value. Part of the reason for the confusion here is that, in truth, there is no single way that this can be achieved. There are, however, two main methods that are employed by the majority of highly valued crypto assets. These are known as Proof-of-Work (PoW) and Proof-of-Stake (PoS), respectively.
Proof-of-Stake
PoS is the second most popular verification method for crypto tokens, and awareness of it has spiked since Ethereum – the world’s second-largest token, successfully completed the first stage of its transition from PoW verification to PoS back in September of 2022. This resulted in ETH’s energy requirements dropping by 99.95%. This sounds remarkable, but really it was only to be expected as PoS does not rely on mining to generate value.
Instead, the value in PoS comes from individuals staking some of their own coins towards the verification process. The generated value is then randomly awarded to a participating validator. By ‘buying in’ to the process, PoS coins enjoy greater stability. They can also be thought of as fairer, as validators are not restricted by the computational power at their disposal.
The significantly lower energy requirements of PoS make it a more sustainable option and, thus, one that will likely achieve greater success in the long run. However, don’t bank on PoS coins outperforming PoW assets any time soon. When Ethereum completed its transition, its price dropped by some 15.2% the following week.
Astute traders in the crypto space, however, anticipated this, as PoS limits liquidity for trades when compared with PoW, as it requires validators to lock their coins up in the process.
What’s more, the higher volatility and corresponding growth of Bitcoin make it arguably a better short-term investment option. Many more still are thought to have simply opened a position on Ethereum ahead of the merge using crypto CFD (Change for Difference) trades – such as those provided by industry mainstays such as Equiti, to benefit from its predictable downturn.
Proof-of-Work
The largest and best-known validation process is Proof-of-Work, as it is the verification method employed by Bitcoin and, until recently, Ethereum. Coins that employ PoW ach
Crypto miners compete against one another to solve these equations, resulting in them being awarded crypto tokens. To outperform their competitors, the most successful miners oversee vast server farms that employ enormous computational power in order to solve these mathematical problems quickly.
Unsurprisingly, this requires a great deal of energy. In fact, at present, it is estimated that the energy required to mine PoW tokens is equivalent to that of Argentina. This has led to environmental campaigners to criticize this verification process.
Pros and Cons
Ultimately deciding on which verification process you want to invest in is highly dependent on your goals and requirements, as both have benefits and drawbacks unique to their design.
Proof-of-Stake is far less energy intensive – as such if your portfolio is considerate of environmental impacts, tokens employing this method would be a better ideological fit. PoS also offers faster validation times, as new blocks can be added without first mining for them.
On the downside, critics of PoS rightly highlight that, unlike PoW, PoS tokens are not truly decentralized. There is a very real possibility of wealthy nodes amassing an ever-growing portion of the total stake, limiting such a token’s potential to be outside of any one individual or organization’s control.
As for PoW – it is highly decentralized and thus sticks close to the underlying philosophy many believe is the modus operandi of cryptocurrencies. This must, however, be considered alongside the very real environmental concerns such coins represent.
