Elias Zeekeh, MBA, CPA, CMA
Simple Explanation: Proof of Work vs Proof of Stake
Most individuals following the cryptocurrency industry will have heard about the environmental concerns surrounding proof of work blockchains most notably Bitcoin.
So what is exactly are proof of work blockchains, and what is it about them that is viewed as problematic? Proof of work is a decentralized consensus mechanism in which members of a network verify transactions in a naturally competitive manner in order to earn cryptocurrency from the network.
In the context of Bitcoin individuals and groups utilize computer power to verify these transactions and are referred to as miners. The reason it is competitive is because computational power is directly related to the ability to earn bitcoin, so miners have the incentive to try and boost their output by investing in more and more powerful single purpose hardware to gain an advantage. The result of this will be more and more energy output being required to mine bitcoin, and hence can lead to the perception that bitcoin and proof of work blockchains in general are not good for the environment. This is especially the case if the generation is not coming from renewable energy sources.
So what makes proof of stake different? Afterall we're still talking about computers in a network verifying transactions? The difference is that the process of validating transactions is not a competitive one. Who gets to validate or mine a block on a cryptocurrency network is selected randomly. Therefore, there is not an incentive to have an "arms race" between miners/validators to utilize more and more energy consuming equipment to gain an advantage.
The exact details of how proof of stake networks operate can differ but in the simplest terms proof of stake is validation sharing across a crypto network as opposed to validation competition.