The two main consensus mechanisms used by cryptocurrencies to validate new transactions, add them to the blockchain, and create new tokens are Proof of Work (PoW) and Proof of Stake (PoS).
Used by Bitcoin, Proof of Work uses mining to achieve its goals while Proof of Stake is using staking to achieve the same things.
What is Proof of Work?
Bitcoin pioneered the use of Proof of Work as a crypto consensus technique. Mining and Proof of Work as concepts that are closely connected. It's called "Proof of Work" because the network using it requires a lot of processing power. Proof of Work blockchains are secured and validated by miners all around the globe, competing to solve a math challenge first. The winner gets to update the blockchain with the most recent confirmed transaction and is paid with a fixed amount of cryptocurrency by the network.
Proof of Work offers several advantages, particularly for a basic but extremely valued cryptocurrency like Bitcoin. It's a proven method of keeping a secure and decentralized blockchain. As one cryptocurrency value rises, more miners would join the network which would increase its power and security.
On the other hand, it is an energy-intensive operation that may struggle to scale to meet the massive number of transactions that smart-contract compatible blockchains such as Ethereum can create. As a result, solutions have emerged, one of the most popular which is known as Proof of Stake.
What is Proof of Stake?
In 2011, a new solution was proposed to overcome the not-so-efficient Proof of Work consensus and reduce the amount of computational resources required to run the blockchain network. Instead of the energy-intensive operation, this concept is based on the existence of a verifiable stake in the ecosystem.
To put it simply, the details can vary with each project but in general, Proof of Stake blockchains use a network of validators who contribute (stake) their own cryptocurrency in return for rewards, validating transactions and updating the blockchain. It works like the following:
The network chooses a winner based on how much cryptocurrency each validator has in the pool and the time period they've had it there. Basically, the network rewards the most invested users who stake the most and longest.
When the winner has confirmed the most recent block of transactions, other validators can confirm that the block is accurate. The blockchain is updated when a certain amount of confirmations are received.
Every validator who participates receives a reward in the form of a cryptocurrency which is distributed by the network in proportion to how much the validators are staking in the pool.
Differences between Proof of Work and Proof of Stake
To put it simply, Proof of Work and Proof of Stake are two different ways that you can mine a cryptocurrency.
A significant distinction between the two consensus systems is their use of energy. Proof of Stake blockchains allows networks to run with significantly reduced resource usage since miners do not need to spend power on duplicative procedures which are competing to solve the same problem.
Another major difference between the two is how they delegate rewards for each verified transaction. For Proof of Work, miners compete to solve problems using their processing power and get rewards for it, while for Proof of Stake, the winner is based on the size of their stake.