Proof-of-Stake versus Proof-of-Work

If you’ve been dealing with cryptocurrencies for a while, you must have heard about proof-of-stake and proof-of-work. These are usually referred to as consensus mechanisms and allow blockchain technology to operate properly. They keep cryptocurrency transactions secure by ensuring that anyone who adds a new transaction is a genuine user. 

While they work differently, both proof-of-stake and proof-of-work algorithms verify that users have poured some resources into the blockchain, be it time, energy, or money. By doing this, these consensus mechanisms demoralize bad actors and incentivize good ones. This ultimately reduces the cases of fraud, especially double-spending. 

What is Proof-of-Work?

Proof-of-Work (PoW) was the first consensus mechanism to be conceptualized. Believe it or not, this concept was proposed in 1993, before cryptocurrencies were even a thing. At this time, PoW was primarily used to fight denial-of-service attacks and spasm emails on a network. So it wasn’t surprising that when Bitcoin was introduced in 2008, PoW was used as a way to validate new blocks – this was pioneered by Satoshi Nakamoto. 

Apart from Bitcoin, the following cryptocurrencies also use proof-of-work:

1. Dogecoin – it was launched in 2013 and is based on the Doge meme that became popular in the same year
2. Ethereum 1.0 – it was originally released in 2015 and allows users to create and trade in NFTs
3. Monero – it was launched in 2014 and is less transparent than Bitcoin, offering miners anonymity
4. Litecoin – this altcoin was launched in 2011 and is based on Bitcoin’s code. However, it offers faster transaction speeds than Bitcoin’s 

How does PoW work?

If there’s one thing you should know about PoW, it’s that it requires the user to put in an amount of work for them to get a reward (crypto coin). In simple terms, it requires a user to solve a mathematical puzzle before other users. This process relies a lot on trial and error and requires expensive computers. Once this is accomplished, the user will be allowed to add a new group of transactions to the existing chain. 

This new group is referred to as a block and will be broadcasted to other computers (nodes) in the network. These nodes will then audit the new block and pre-existing ledger. If everything is in order, the block will be chained to the previous one and the user will be rewarded with some crypto coins. 

This entire process is what is commonly referred to as mining and the users who participate in it are called miners. Ultimately, it is the act of solving the mathematical problem that is aptly named Proof-of-Work. More importantly, it is the willingness of other miners to verify new blocks that keeps the system secure. This concept is further explored in Nathaniel Popper’s book – Digital Gold. 

Pros and cons of proof-of-work

The greatest disadvantage of PoW is the fact that it requires a lot of money, time, and energy – it can as well make you bankrupt. You need to be able to afford expensive computers and high electricity bills to embark on the mining process. It also takes some time to figure out the mathematical puzzles that require solving. However, this is also what makes it difficult to break into a PoW system like Bitcoin. 

The effort, money, and energy required will make most attackers give up before trying anything. And even those that would be willing to spend their resources to try would be identified after they broadcast their new block to other nodes in the network. Ultimately, such systems can only be bypassed if a miner sets up enough resources to count as more than 50% of all the resources in the network. In such a case, even if the miner broadcasts a bad block, his >50% of nodes will accept it. 

However, considering how big such networks usually are, this is impossible unless a government or big private entity gets involved. Even if this happens though, other miners can easily create a branch of the blockchain and remain unaffected by the attack. Such branches are known as forks and they contribute to the security of PoW. 

Another advantage of PoW is the fact that it promotes healthy competition among miners, inadvertently contributing to technological advancements. Beyond that, it can help communities tap into their renewable sources of energy and use them to create economic opportunities. This has proven particularly useful in remote areas that have previously found it difficult or impossible to transport or sell their energy. 

Great examples of this phenomenon are the Chinese provinces of Yunnan and Sichuan. They both have wet seasons that have allowed them to produce large amounts of hydroelectric power that they can’t transport and sell. So they decided to use that energy to start mining Bitcoin – this move led them to boost China’s hash rate. To make the pros and cons of proof-of-work, here is a simple table you can refer to:

Pros	Cons
A high barrier to entry makes it more secure	Consumes a lot of electricity
Promotes healthy competition that leads to increased efficiency & technological advancement	Produces a lot of e-waste, particularly because more powerful chips are constantly being produced
Open and decentralized network	The high energy consumption makes mining facilities easy to trace
Proven to work at scale	It’s easy for monopolies to develop in the mining industry, particularly in ASIC chip manufacturing
Encourages miners to looker for cheaper sources of energy, ultimately promoting renewable energy
Allows remote communities to efficiently use trapped energy

 

What is proof-of-stake?

Proof-of-Stake (PoS) is a consensus mechanism proposed in 2011 to deal with the disadvantages of Proof-of-Work. As its name suggests, it relies on a user’s ability to prove that they have a stake in the network. How much stake you have is dependent on the number of cryptocurrency coins you have in the blockchain system. 

Over the years, proof-of-stake has become quite popular in the cryptocurrency world. It is currently used by around 80 of them, some of which are:

• Cardano
• Solana
• Terra
• Tezos
• EOS
• Tron
• Cosmos

How does PoS work?

Proof-of-stake works like a voting system where users are not limited to one vote. So if a user has 100 crypto coins, they can use them to “vote” for a certain block to be added to the chain. The more coins you use, the more priority you are given. This process of offering up your coins to support a block is what we call staking. 

Staking requires you to buy crypto coins in the system before getting an opinion. It is a lot like depositing money in a savings account that then allows you to vouch for certain products. What’s more? Just like a savings account, it allows you to gain interest on what you already have. 

So the longer you stake your crypto coins, the more coins you earn as interest. Keep in mind though – you can withdraw your stake at any time, and lose any future interest you would have earned. Ultimately, it’s the people who have monetarily invested in a cryptocurrency system that validate blocks of transactions. That’s why they are usually referred to as validators. 

Pros and cons of proof-of-stake

The biggest advantage of proof-of-stake is that you don’t need to get tons of powerful computers or pay high electricity bills to participate in the blockchain system. This is not only great for the environment but also easy on the pocket (phew). Ultimately, this makes it easy for the common citizen to join the system. 

Interestingly, a proof-of-stake system remains secure for the same reason that a proof-of-work one does – it’s hard for an attacker to garner more than 50% of validating power. The only difference is that in a PoS system, this power doesn’t lie in owning the most equipment but rather owning the most crypto coin. Another thing that sets PoS systems apart is that they can punish bad actors by making them lose their stake. 

Another great advantage of PoS is that it’s fast, resulting in fast transaction speeds. This is because its algorithm usually picks validators quickly. But after this, the nodes will still have to take time auditing the newly-found blocks that validators pick. 

However, the main argument against PoS is that its low barrier to entry can make coin accumulation easier and ultimately make the system less secure. This is particularly an issue when it comes to attackers with deep pockets. It’s cheaper for them to buy 51% of the coins in a PoS system than to invest 51% of the equipment in a PoW system. 

All hope is not lost though. As more and more people invest in PoS networks and their coins, centralization will be harder and attacks will be more difficult. To get a clearer understanding of PoS pros and cons as of now though, take a look at the table below:

Pros	Cons
Energy-efficient and environmentally-friendly	Less secure than proof-of-work
Allows for fast transactions	Can easily become centralized due to coin hoarding
Economically rewards those who add blocks	Still unproven at large scale
Low barrier to entry
Not easy to trace, providing validators with anonymity

 

Proof-of-Stake versus Proof-of-Work: When should PoW or PoS be used?

Generally, the type of consensus mechanism you should use depends on the network’s needs. For instance, if its most pressing needs are security and trust-building, proof-of-work is the best option for you. But if the top priority is ensuring high transaction speeds, proof-of-stake is right up your alley. 

Keep in mind though – it’s not advisable to choose proof-of-work if you suspect that later on, you’ll want to move to proof-of-stake. The migration process is complicated and can take years, especially once the cryptocurrency is established.

Proof-of-Work vs Proof-of-Stake: Why is PoS better than PoW?

In the battle of Proof-of-Stake versus Proof-of-Work, the former usually wins. This is because it was created to solve the three main problems that plague PoW:

 

1. High energy consumption –  PoS requires little electrical power, conserving energy and making it easy and cheap for many to join the network
2. Negative environmental impact – Apart from conserving energy, PoS reduces the amount of e-waste produced every year due to crypto mining
3. Scalability issues – since PoS has a low barrier to entry, it makes it easy for validators to scale operations 

The financial takeaway

While Proof-of-Work has history on its side, Proof-of-Stake is becoming more and more popular by the day. Even Ethereum is currently migrating to PoS – and yet this is just the beginning. Better consensus mechanisms are being developed every day and some cryptocurrencies have already started using new entrants. These include Delegated proof-of-stake, Proof-of-Authority, and Proof-of-Weight. Ultimately, it’s up to you to choose the consensus mechanism that works for you or even, dare we say, make your own!

 

(с) The article is written by Nancy Akinyi Ouma, 2022