Lesson 2 of 7 · All lessons in this module
- Distributed ledgers, blockchains and their financial usesVideo lesson
- Proof of work, proof of stake and network types
- Types of digital assets: cryptocurrencies and tokens
- Digital assets versus traditional financial assets
- Direct investment: wallets, exchanges and their risks
- Indirect vehicles, asset-backed tokens and DeFi
- Risk, return and diversification of digital assets
Lesson 2 of 7 · 13 min
Proof of work, proof of stake and network types
A consensus protocol decides how blocks join the chain: proof of work makes miners spend computing power to win the right, proof of stake makes validators pledge assets, both reward validation with new digital assets, and the network itself can be open to all (permissionless) or restricted (permissioned).
In short
- The consensus protocol is the set of rules governing how blocks are cryptographically chained and become the accepted, immutable history.
- Proof of work (PoW): miners use powerful computers and lots of energy to solve a hard puzzle; the winner adds the block. The longest chain is treated as the truth.
- Under PoW, rewriting history requires more than half of the network's computing power: the 51% attack threshold.
- Proof of stake (PoS): validators pledge (stake) digital assets to propose a block; a majority of other stakers must attest to it.
- Under both protocols, successful validation is rewarded with new digital assets ("mining").
- Permissionless networks are open to anyone and fully decentralised (slower, costlier); permissioned networks restrict access and roles (faster, cheaper, centrally governed).
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