Proof-of-Work v Proof-of-Stake

Cryptocurrencies are almost all built on two different approaches – proof-of-work or proof-of-state.

Bitcoin is the best known of those built on proof-of-work. With this approach, the decentralised network, which nobody controls, exists to prove that you did the work to mine the coin. The existence and robustness of the network provides the evidence that the proof-of-work is credible.

Bitcoin is a ‘permissionless’ network, meaning anybody can participate in the system.

An example of a proof-of-stake approach is Ethereum. This is a network where there is a backing asset which secures the value. There is proof of the backing asset, the stake. Ethereum can support smart contracts which makes it attractive for business and governments.

There are reported to be over 5,000 different cryptocurrencies, all of which are based on variations of these approaches and characteristics. Each has different strengths and weaknesses.