The Difference Between Proof of Work and Proof of Stake
In order for a blockchain network to be maintained, someone is needed to create and connect blocks, recording and verifying transactions. Since there are no volunteers to maintain the network, incentives are provided to ensure that this activity continues. These incentives are the cryptocurrencies we know. Depending on the method of verifying and recording transactions, they can be broadly divided into Proof of Work (PoW) and Proof of Stake (PoS).
The Bitcoin network maintains itself by replacing the process of recording transactions with solving complex and difficult mathematical problems. This method of proving that direct work has been done is called Proof of Work (PoW). The person who solves the mathematical problem first is rewarded with Bitcoin. This act of solving the problem and receiving incentives is called mining.
On the other hand, blockchains that adopt Proof of Stake (e.g., Ethereum) rely on validators to create and verify blocks and ensure the stability of the network based on their stake. This method of entrusting the cryptocurrency of the blockchain to the network and receiving rewards is called staking. Validators with more stake have a higher probability of creating and verifying blocks, and proportionally receive more rewards.
What is Staking?
Staking is the act of entrusting a certain amount of cryptocurrency you own to the network. The entrusted cryptocurrency is used for blockchain verification (Proof of Stake), and in return, you receive cryptocurrency as a reward.
As staking increases, the security and safety of the network improve. For example, as more people participate in Ethereum staking, the number of people involved in block creation and verification increases, thereby enhancing security and safety. However, not all cryptocurrencies support staking.
Typically, to stake, you need to operate a node on your computer or another device for 24 hours to verify block creation. Also, to stake Ethereum, you must have at least 32 ETH. Due to these barriers, many cryptocurrency exchanges and related services often provide staking services on behalf of users.
Differences Between Staking and Traditional Financial Products
Participating in staking, where you deposit assets and receive rewards, may seem similar to bank savings accounts. However, there is a significant difference between bank savings and staking in terms of maintaining the blockchain network.
Blockchain networks inherently have malicious actors who may attempt to manipulate transaction information to gain profit through hacking attacks. Such attacks typically involve securing a certain amount of cryptocurrency.
Malicious actors would need to control more than 51% of the entire network to manipulate information. As staking increases, the cost of such attacks also increases. Ultimately, the more people participate in staking, the more secure the blockchain becomes. This is the reason why Proof of Stake-based blockchains provide economic rewards to encourage more staking participation.
Staking has the advantage of expecting additional returns by entrusting your cryptocurrency to the network, but it also has disadvantages. The staked cryptocurrency cannot be moved for a certain period, making it impossible for the holder to sell it at the desired time. Because the cryptocurrency is locked in staking, it is difficult to respond if the market price of the cryptocurrency changes drastically.
Bank savings products can be withdrawn at any time, but the representative Ethereum staking was previously not possible to withdraw the entrusted Ethereum. However, recent updates such as the Ethereum Shanghai upgrade are planned to implement the ability to freely withdraw Ethereum locked in the network.