Blockchain technology is decentralized: you don’t need a middleman, like a bank, to send coins or tokens from point A to point B. That’s one of the great things about it. In a more traditional financial transaction, the intermediary provides security – but in a crypto transaction, the security comes from the blockchain itself.
There are two ways that blockchains secure transactions: proof of work and proof of stake. If you’re investing in a project, you’ll want to know which method it uses – and how that’s keeping your crypto transactions safe.
In PoW, miners compete to solve complex cryptographic puzzles and secure blocks of transactions on the blockchain. The first miner to prove that they’ve solved the puzzle wins new coins and the transaction fees of the block.
Miners need vast computing power to crack these challenging puzzles, and that consumes a lot of electricity. But if the puzzles were easy, the blockchain wouldn’t be as safe. To steal your crypto while a transaction is underway, an attacker needs more than half the mining power of the entire blockchain. That would allow them to override the network and reverse the transaction for their own benefit. In other words, the more mining power a PoW blockchain has, the harder it is to execute a “51% attack.”
PoS doesn’t use mining or miners. Instead, validators secure transaction blocks by “staking” crypto as collateral – that is, they front their own coins to verify your transaction. This works more like a wheel of fortune than the competition setup of PoW – and it uses much less electricity. The network randomly selects a winning validator to receive new coins and the block’s transaction fees. On average, validators who stake more collateral have a higher chance of winning.
Like PoW, an attacker would need to fork out an obscene amount of money to hijack your crypto transaction – only they wouldn’t be spending it on electricity and expensive mining equipment. Rather, they’d need to front more than half the crypto of the entire staking network to override the other validators. So there’d be no point in stealing the proceeds of a single crypto transaction: the juice wouldn’t be worth the squeeze.
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It’s hard to say if one method is more secure than the other. But you can think of it like this: a blockchain is safer when it costs more money, time, and resources to mount an attack (all else equal).
Take bitcoin, for example. It runs on PoW, but the total mining power (known as the “hash rate”) of the network is a lot higher than that of a smaller PoW blockchain – like, say, Litecoin. In fact, Bitcoin’s current hash rate is almost 500,000 times higher than Litecoin’s. In other words, an attacker would need a lot more computer power to hack Bitcoin than Litecoin.
This guide was produced by Finimize in partnership with Ledger.
Check out Ledger’s mini-website at finimize.com.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.