Bitcoin PoW / PoS transaction: what you need to know

What is a PoW/PoS bitcoin transaction?

14 Jan, 2020 Colin Baseman

All cryptocurrencies can be divided based on the generation method into mined (PoW) and non-mined (PoS). In each case, transactions must be processed by the network and then verified. Only then, it is possible to avoid a dangerous potential flaw, the double-spending.

РoW features

This model is called Proof-of-Work. It requires high-power computers to perform complex mathematical calculations and validate transaction blocks. This is the encryption process. It protects transactions from third parties and hackers.

The reward is transferred to the first person to solve the problem and confirm a block of transactions. When generating a PoW, the miner gets rewarded with the coin he works with. Then the cryptocurrency can be sold. It is also possible to immediately convert to Fiat money.

One of the important disadvantages of mining is the huge amount of electricity consumed and the need to use high-power computing equipment. Therefore, large companies are concentrating their capacity in countries where electricity is cheap. The temperature of graphics cards and servers during operation is greatly increased and puts software in danger. That is why it is so important to think through the cooling process.

Another drawback of coins that work on the PoW model is the possible vulnerability to a 51%  attack. A huge amount of equipment for mining bitcoin, Ethereum and Litecoin makes them resistant to such a danger. Other coins have less security.


PoS features

 These cryptocurrencies include pre-created ones: Cardano, NEO, EOS, Stellar and others. Network support does not require high-power computers, and participants do not need to compete to confirm the next block. This type of coin generation can significantly reduce costs. Transactions are checked by the crypto owners. The more coins in the account, the higher the chances that the user will be selected to confirm transactions.

Many coins use mechanisms to prevent owners of a large number of assets from dominating the verification process. A solution to this is the algorithm selecting random users to verify a transaction block. Therefore, even those who own a small number of coins can take part in the process.

The PoS method is more progressive than PoW. It does not require so much energy and resources. Besides, there is no risk of  a 51%  miners attack. On the other hand, if an individual owns more than 50% of tokens, there is a risk that they will gain control over the network. If the capitalization of a digital coin is estimated in billions of dollars, it is unlikely to happen.

Information about the generation method used is extremely important when choosing a cryptocurrency. Especially if the goal is not just to make investments, but also to increase your asset with the help of mining.