Proof of Stake vs. Proof of Work

Key takeaways

Anyone familiar with the crypt world must have often heard these two terms: Proof-of-work (PoW) and Proof-of-Stake (PoS).
Rather than contributing to 51% of the network’s computational resources, you now have to own at least 51% of the coins in a network.
The choice could be challenging and may depend on the costs and centralization.

Anyone familiar with the crypt world must have often heard these two terms: Proof-of-work (PoW) and Proof-of-Stake (PoS). These two key components of blockchain are essential to validate cryptocurrency transactions. Most cryptocurrencies are not issued or controlled by central banks; this decentralized nature of cryptocurrency is often believed to be its main benefit. However, without a central authority to verify transactions, there can also be issues with counterfeit cryptocurrency.

Let’s talk about what a consensus mechanism is, its various types, and pros and cons of PoW and PoS.

What is a Consensus Mechanism? #

For any centrally administrated system, like a database of driving licenses in a country, one central administrator is responsible for the maintenance and updates of the database. This responsibility includes making any updates - like adding or deleting certain people who are qualified to receive certain licenses. In this way, the duty of maintaining legitimate records remains with the central authority, which remains solely in charge.

Public blockchain that operate as decentralized systems on a global scale don’t have any single authoritative figure. Contributions from hundreds of thousands of participants help to verify transactions and authenticate contributions on the blockchain, which includes block mining activities.

In such an ever-changing system, we need to ensure that all happening on the network is authentic and that all parties agree with the consensus regarding the status of the ledger. The consensus mechanism handles this key task: it’s a set rule that decides on the legitimacy of participation from various contributors (i.e., nodes or transactors) from around the network.

Types of Consensus Mechanisms #

There are several consensus mechanisms developed and used, each with their own advantages and disadvantages. The mechanisms differ in how the verification of transactions is rewarded. Mentioned below are the various types of consensus mechanisms:

Original diagram for Techfastly by Vin Patel.

Let’s understand the two common consensus mechanisms in detail:

Proof of Work Mechanism (PoW) #

Proof of work is a mechanism that was conceptualized way before the creation of crypt assets. Proof of work, also known as PoW, has been around since 1993 when it was first introduced by Cynthia Work and Monk Nor. It was Marks Jakobsson who coined the term in the year 1999.

Proof of work is the first consensus mechanism proposed, but even after many years of operation, it is nowhere near perfect. This did not stop it from being the most dominant consensus mechanism that most of the cryptocurrencies in circulation use to date. It was first introduced in Bitcoin by Satoshi Nakamoto in the 2008 Bitcoin Whitepaper (The algorithm was previously used in Adam Back’s HashCash).

It is an energy-intensive consensus protocol which requires miners to compete against one another to solve complex cryptographic puzzles using high-powered computers. The first to come up with a 64-digit hexadecimal number (hash) earns the right to form the new block and confirm transactions. The successful miner is rewarded with ‘block reward’, a predetermined amount of crypt.

The mechanism is secure, but it is still vulnerable to a 51% attack. In layman’s terms, 51% of the nodes in the network decide to be on the evil team to steal money by taking the blockchain network hostage. They control more than 51% of the computer power that is used for mining in the network. This is unlikely to happen in large-scale cryptocurrencies but smaller altcoin like Bitcoin Gold have been subject to this attack in the past.

The major downside for PoW is that it requires a lot of computational resources and energy. It also has limitations on scalability because it’s difficult for new miners to compete with existing ones that have large infrastructure costs.

Pros and Cons of PoW Mechanism: #

Pros of Proof of Work model: #

Miners are rewarded with a block reward and a share of the transaction fee.
It leads to more decentralized networks.
The network gets difficult and costly to attack.

Cons of Proof of Work model: #

It is not insulated to 51% attack.
A lot of computational power is wasted once the equations are solved.
An excessive amount of electricity is consumed, which could impact the environment in the near future.

Proof of Stake Mechanism (PoS) #

Proof of Stake was created to address the mining process’s energy consumption problem in a Proof of Work system. Sunny King and Scott Naval introduced it in 2012.

This mechanism does not involve miners, and there is no need for high computational power, making it a greener alternative to Proof of Work. The creators replaced the mining process with something called “staking.” Instead of mining a block, the responsibility of creating a block is given to a user in a deterministic way, depending upon their stake (the amount of coins the individual owns). The individual with a higher stake has better chances of being chosen as the validator and will receive more staking rewards. This does seem pretty unfair as it allows for a centralization-like situation.

This brings us to another problem, similar to the 51% attack. Rather than contributing to 51% of the network’s computational resources, you now have to own at least 51% of the coins in a network. This seems dangerous, but it is highly unlikely for anyone to trust a coin so much.

Unlike in Proof of Work, no new coins are minted. The validators are only paid through transaction fees where the rewards are from coins that were already created.

There are a few other issues with Proof of Stake like initial distribution of coins, monopolization, and the nothing at stake problem. All these issues were addressed in 2013 by the creation of Peercoin. Proof of Work turned heads majorly when Ethereum 2.0 announced that they are moving to a Proof of Stake system.

Pros and Cons of PoS Mechanism: #

Pros of Proof of Stake model: #

Theoretically, insulated to the 51% attack.
Better rewards to the validators.
It does not require a lot of computational power, thus is more energy-efficient.

Cons of Proof of Stake model: #

It is less secure as compared to PoW.
It is more susceptible to low-cost attacks
It leads to a less decentralized network.

Proof of Work Vs Proof of Stake #

Energy Consumption #

As already mentioned, Proof of Stake tackled the power consumption problem and adopted a greener mechanism. Due to mining farms setup around the world to mine cryptocurrencies, this practice’s energy consumption shot up like crazy.

Study reveals Bitcoin’s electricity consumption is underestimated and finds the network ‘represents close to half of the current global data center electricity use’. This is alarming. It is good to see that the future of cryptocurrency is moving towards PoS which requires only a small fraction of the energy.

Decentralization

Even though PoS is the future, it does have its flaws. In comparison, PoW is more decentralized since the validator being chosen does not depend upon the number of coins owned. Not everyone will want the overhead of becoming a miner.

In the case of PoS, the validators neither have to spend on mining equipment nor have to pay electricity bills. All they need to have is some cryptocurrency, which they keep staking. This leads to centralization as the coins are with the same person instead of a miner who will have to cash in some cryptocurrency to pay the electricity bills.

The PoW mechanism results in better distribution of coins and maintains the decentralized state of the network more fairly.

Security

Proof of Work is a tried and tested mechanism. It has shown its strength with Bitcoin, and the world is witness. Since Proof of Stake is relatively new, it just can’t be used without a lot of testing.

The problem with PoS is when a blockchain is forked due to some reason. Validators can validate transactions of both the chains without any consequences. This can be exploited to created multiple forks of the same blockchain. It introduces the problem of double spending where the coin spent in the original chain might not be added to the forked chain. Even though solutions have been proposed to solve this problem, it is not yet convincing from a user’s perspective.

PoW is comparatively safer since miners will have to decide to split their mining power to the original and forked chain but are unlikely to do so as the low mining power resulting from the split will not be enough for mining.

Difference Between Proof of Work (PoW) and Proof of Stake (PoS) in Blockchain #

Original diagram for Techfastly by Vin Patel.

Conclusion #

The blockchain ecosystem must remain secure. Both the consensus mechanisms are viable to secure the network. It depends on the developer as to which mechanism should be implemented for the security of the ecosystem.

If a miner misbehaves, it will result in being cut off economically or financially from the network. Punishing the misbehaved users is a crucial act to prevent cheating in the blockchain ecosystem. In theory, it is much cheaper to attack a Proof-of-Stake blockchain. Although, there have been several upgrades in the Proof-of-Stake mechanism to make it more secure.

The favoritism is towards the Proof-of-Work mechanism; however, it is difficult to mention which one is better. Both the algorithms are accessible to all the users and focus on preventing cheating. The choice could be challenging and may depend on the costs and centralization.

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