Proof of Work
Proof-of-work (PoW) is a requirement that must be performed by a miner in order to add a block to the blockchain. PoW occurs in the mining process, when a miner successfully solves a complex mathematical puzzle on the network. Answers to the problem are known as a hash; the hash that is produced must be valid, in that it must be lower than the target hash. A target hash is simply the hash value that has been determined by the network. A hash that is above the target hash will be invalid, and the puzzle will not be solved. As more of these puzzles are solved, the network will automatically increase its difficulty. What this means is that the target hash value will be lowered, so that the number of valid hash values capable of being produced are also lowered. This correspondingly makes it much more difficult for a miner to generate a valid hash and solve the network’s mathematical puzzle.
Solving these mathematical puzzles often requires a lot of guesses, or the generation of hash values. Mining can be an expensive process for miners, as the machinery and electrical power needed to produce hash values can be costly. So much so that miners will often use mining pools to reduce costs, and also increase the likelihood of generating a valid hash value.
PoW also serves as a security measure, it deters denial of service (DoS) attacks because the network requires the attacker to commit significant processing power to generate a valid hash value, which can be an extremely expensive process.
Proof of Stake
A limitation to the PoW model is that a significant amount of electrical energy is wasted generating random guesses. It is estimated that PoW for the Bitcoin blockchain could consume as much electricity as Denmark by 2020. Proof-of-stake (PoS) aims to solve this energy problem by requiring miners to put up a stake or lock up a certain amount of their funds to validate a block, instead of having to generate hash values. PoS miners are limited to mining a percentage of transactions that is reflective of their stake in the cryptocurrency. For example, a miner who owns 5% of Bitcoin available may only mine 5% of blocks on the network. Furthermore, there is no block reward in the PoS system, instead, miners are rewarded with transaction fees for the verification of a block.