A blockchain is a timestamped distributed ledger that collects information in blocks. These blocks of information contain transactions and other types of data. Each new block of data, once verified, is chained onto the previous block of data, forming what we call a “blockchain.” 

Public blockchains are decentralized. Since there is no central authority in charge, the network participants must approve the transactions before the data can be verified, recorded, and added to the blockchain.

These participants are actually a network of computers, also called nodes, that work together in the validation process. These nodes must reach an agreement as to whether new transactions on the network are valid and in what order the transactions will occur. This agreement process is called a consensus mechanism. 

Let’s take a look at the two main consensus mechanisms of public blockchains; Proof-of-Work (PoW) and Proof-of-Stake (PoS):

Proof-of-Work (PoW) is a consensus mechanism used to confirm transactions and create new blocks on the chain. PoW was first made popular with the Bitcoin Network.

The participants involved in PoW are known as miner nodes or simply, miners. Miners solve complex computational mathematical equations called proofs of work. 

Miners are incentivized by the prospect of a reward given to the first miner who solves equations for the most recent block of transactions and broadcasts the new block to the rest of the nodes. Once each node independently verifies the new block, it is added to their respective copy of the ledger.

PoW creates a secure, verifiable, up-to-date record of the blockchain. On the downside, however, PoW networks are limited in speed and scale due to their energy-intensive process. Also, the hardware and energy costs of mining have become too expensive for the average person to participate in and are now mostly done by large-scale mining operators who have amassed major influence over updates and decisions regarding the network’s protocol. 

In addition to the above drawbacks, since PoW has a vast network of computers consistently solving complex equations, proof-of-work uses a massive amount of electricity which is causing increasing environmental concerns. It is said that the Bitcoin network has the same annual carbon footprint as the entire nation of New Zealand. 

In 2012, Scott Nadal and Sunny King developed the proof-of-stake (PoS) model as an alternative to proof-of-work. 

PoS blockchains do not have the low speed and scalability issues associated with PoW, and the barrier to entry is also improved. Instead of using miners to solve proofs of work, PoS employs validators who “stake” crypto native to the applicable blockchain. The staked coins are used as collateral. The network selects a validator to verify the transactions on a block, and if a chosen validator is dishonest or does a poor job, they can lose a portion of their staked coins.

In PoS, validators are incentivized through earning profits from the transaction fees rather than from solving equations as miners do, which drastically reduces the massive carbon footprint associated with PoW.

One of the first networks to incorporate proof-of-stake was Tezos. An innovative self-amending blockchain, Tezos aligns the incentives of bakers (validators) and stakeholders which keeps costs low, prioritizes decentralization and accountable governance, and puts network power in the hands of stakeholders.