Proof-of-stake and proof-of-work are known as consensus mechanisms. Both, in different ways, help ensure users are honest with transactions, through incentivizing good actors and making it extremely difficult and expensive for bad actors. This reduces fraud such as double spending.

To understand what the difference is between proof-of-work vs. proof-of-stake, it helps to know a bit about mining.

In proof-of-work, verifying cryptocurrency transactions is done through mining. In proof of stake, validators are chosen based on a set of rules depending on the "stake" they have in the blockchain, meaning how much of that token they commit to locking up to have a chance to be chosen as a validator. In either case, the cryptocurrencies are designed to be decentralized and distributed, which means that transactions are visible to and verified by computers worldwide.

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Proof-of-work vs. proof-of-stake: Which is better?

Proof of work is a competition between miners to solve cryptographic puzzles and validate transaction in order to earn block rewards. Proof of stake implements randomly chosen validators to make sure the transaction is reliable, compensating them in return with crypto. Each choice has unique advantages and disadvantages.

Downsides of proof-of-work

Proof-of-work requires a significant amount of energy to verify transactions. Since the computers on the network must spend a lot of energy and operate a lot, the blockchain is less environmentally friendly than other systems.

Another problem some raise is that because of the competition between miners for rewards, a small number of mining pools control the blockchain, a kind of de-facto centralization. It is important to note though that mining pools are made up of individual miners or smaller groups of miners who are free to pull their hashpower if they no longer agree with the direction of the larger mining pool.

Downsides of proof-of-stake

The main issue with proof-of-stake is that it requires an often enormous initial investment. You must purchase enough of the native token of that cryptocurrency to qualify to be a validator, which is dependent on the size of the network. In theory, people must be wealthy or earn enough money to buy a network stake, leading to an exclusively rich blockchain. As cryptocurrencies rise in market value, this issue could become worse.