Bui has given a stick to this post
Currently popular blockchains like Bitcoin or Ethereum (which is slowly changing) use proof-of-work algorithms to validate transactions and create new blocks. The idea is simple: each miner (participant in the network) has to solve a mathematical puzzle. The first one to do so gets rewarded, while the rest validate his solution. Miners can join mining pools in order to have a higher chance of earning a percentage of the mined coin.
Downfalls of proof-of-work:
- huge operation costs - it is estimated that both Bitcoin and Ethereum burn over $1,000,000 of electricity and hardware costs per day
- the 51% attack - a group controls the majority of mining network, enabling it to create fraudulent block and manipulate past transactions
- centralization risk - as of April 2019 China is the leader in bitcoin mining, controlling 65% of the processing power of the Bitcoin network.
Proof-of-stake does the same job in a vastly different way. Each participant deposits their coins for a certain period of time, then the algorithm chooses one validator based on their stake to validate transactions and create new blocks.
This solution uses a lot less resources compared to proof-of-work and mitigates the risk of centralization, as no specific and expensive equipment is required to become a validator.
It also makes the network more secure against the 51% attack, because it would require the attacker to purchase the majority of all existing coins to overtake the network.
