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Blockchain technology is constantly evolving. Legacy cryptos, such as Bitcoin, use something called a “proof of work” verification process to add new data, or blocks, to the blockchain. But there are two up-and-coming methods of approving transactions — proof of stake and proof of history — that could help decrease transaction times, reduce costs, and make blockchain technology more efficient overall.
This article will walk through the differences between proof of stake vs. proof of history and how they fit into the evolution of blockchain technology.
The Short Version
- Blockchains use consensus mechanisms to create rules that guide network participants on how to validate transactions
- Proof of stake and proof of history are two blockchain consensus mechanisms that increase speed and reduce the cost of validating transactions
- Proof of stake is currently the most popular consensus mechanism with the most applications
How Do Blockchains Verify Transactions?
Basically, blockchains are networks of computers that record when cryptocurrency, like Bitcoin, leaves one person’s account and enters someone else’s. These transactions are recorded on a public distributed ledger, which means anyone can see them.
This is different from how traditional banks process transactions. Your bank controls access to information such as where you spend your money and how you earn it. It can also decide whether or not a transaction is legitimate. A blockchain can’t make decisions like a bank. Instead, blockchain participants rely on consensus mechanisms, such as proof of work, to agree on which transactions to approve.
What Is a Consensus Mechanism?
But what are consensus mechanisms, exactly? Essentially they are an algorithm that tells the computers in a blockchain network how to approve transactions.
The blockchain’s participants use the consensus mechanism in combination with the information already on the blockchain to decide whether to approve new transactions. If a request for a new transaction does not match up with the previous information posted to the blockchain it gets rejected.
This critical security feature builds trust in the blockchain because it prevents any single person from making decisions or writing rules that undermine the entire network. And, once a transaction is approved, the record is permanent.
Bitcoin uses an energy-intensive process called proof of work to validate transactions. It needs large amounts of computing power to validate each new data block. Due to the high cost and slow processing time, new approval methods are emerging. The two most popular ones are proof of stake and proof of history.
Proof of Stake
Proof of stake is the primary alternative to proof of work. To approve transactions on a proof of stake blockchain, an individual must put up a certain amount of their own cryptocurrency as collateral or “stake” it.
Blockchain approvers earn crypto as a reward for validating each transaction. The proof of stake algorithm chooses who gets to approve new transactions based on how much collateral they’ve staked. This is different from the proof of work mechanism where all approvers race to be the first person to solve computational puzzles to validate the next block.
Proof of stake uses smart contracts to choose who gets to validate each transaction. These smart contracts are stored on the blockchain. Anyone can view the rules and conditions of the contract, as well as how it will be enforced. This ensures each contract is executed exactly as intended without any possibility of fraud or third party interference.
Proof of stake requires less energy to approve transactions because it doesn’t rely on computers sucking up power as they race to solve computational puzzles. This also makes proof of stake a whole lot faster. Bitcoin, which uses proof of work, validates transactions once every 10 minutes. In comparison, Cardano’s proof of stake blockchain can process around 1 million transactions per second.
It also creates a more even playing field because it allows participants to become validators regardless of how much computing capacity they have.
Proof of stake is generally considered safer than proof of work. Individuals must stake – or lock up – their own crypto as collateral to approve transactions. By having skin in the game, approvers have a strong incentive to be honest and trustworthy. If they approve an incorrect transaction they could lose all the crypto they staked as collateral.
Proof of History
Developed by Solana, proof of history uses time stamps in the approval process, further reducing the amount of energy needed to approve transactions.
Every computer connected to the Solana blockchain has an internal clock. The clock doesn’t tell time like a normal clock. Instead, it keeps track of transactions as a sequence of events, like a timeline. Transactions are approved based on this sequence. A participant approving a transaction can determine the order of transactions based on when they occurred in the timeline. If a transaction does not follow the correct sequence of events it is rejected.
Think of this process like getting stamps on a passport. Every time you cross into a new country, you receive a stamp. You can use geography to show the order in which you visited each country. This order – or sequence – also acts as a timeline. Proof of history uses a similar stamping process to approve transactions based on when they occur.
Proof of history can process transactions even faster than proof of stake. Solana can process upwards of 50,000 transactions per second.
Other Consensus Mechanisms
Proof of stake and proof of history are the two main competitors to the proof of work consensus mechanism, but there are others, such as proof of capacity and proof of burn.
Proof of capacity. This method determines who can approve transactions based on the amount of spare space they have on their computer hard drive. This is similar to the way proof of stake uses collateral to determine who gets to approve each transaction. Burstcoin uses proof of capacity.
Proof of burn. Slimcoin uses this method. It attempts to deter fraudulent activity by eliminating the risk of double-spending, aka using cryptocurrency for a second time after its already been spent. Proof of burn requires validators send a certain amount of crypto to a special wallet where the crypto is “burned” or removed from circulation. When they do that, they are awarded mining rigs, which they can use to mine more crypto and reap crypto rewards.
Proof of Stake vs. Proof of History
Which is better, proof of stake or proof of history?
Right now, Solana is the only blockchain using proof of history. While Solana promises increased scalability, the reality is the consensus mechanism has not been tested on a large scale. There are more blockchains using proof of stake which makes it a more trusted consensus mechanism.
While untested outside of Solana, low fees and quick processing times could make proof of history better suited for processing large volumes of small transactions than a proof of stake.
However, even though proof of history lowers costs and processes transactions faster it isn’t as reliable. Solana has experienced seven outages since its founding in 2020.
By contrast to proof of work, many cryptocurrencies today use a proof of stake consensus mechanism. And, notably, Ethereum (the world’s second-largest crypto) switched from proof of work to proof of stake in September 2022 in what it called The Merge.
Proof of stake and proof of history are big improvements to Bitcoin’s original proof of work consensus mechanism. Both can approve transactions more quickly using less power. They are more environmentally friendly and have fewer barriers to joining blockchain networks.
Proof of stake is the most popular of the two options, but with more testing and user adoption, proof of history could enable greater scalability in the near future.