Understanding the differences between ‘Proof-of-Work’ and ‘Proof of Stake’

Disclaimer: This article is intended for US audiences.

Decentralized peer-to-peer payment networks in the crypto industry are driven by two main categories of consensus mechanisms: Proof-of-Stake (PoS) and Proof-of-Work (PoW).

Blockchain functionality is based on PoW and PoS. Each has its own method to authenticate transactions, coordinate between decentralized participants, and secure assets on the blockchain.

What is Proof of Work?

Bitcoin (BTC) uses Proof-of-Work, an encryption technique, to establish consensus among a decentralized community of Bitcoin miners and validate transactions.

To understand Proof-of-Work, you need to understand how Bitcoin works.

A decentralized peer-to-peer network of miners is responsible for the operation of Bitcoin. Miners gather every 10 minutes to create new blocks that are added to the Bitcoin chain. Transactions are aggregated to create these units.

Each legitimate block is identified by a timestamp. The timestamp of the previous block is always included in the hash of a timestamp. This link allows the formation of a chain that strengthens with each subsequent block.

Bitcoin miners compete to solve a complex mathematical puzzle by expending computational energy (“work”) when a new block is generated. The newest block in the Bitcoin blockchain is added by the first person to solve the PoW puzzle.

Once the PoW puzzle is solved, the newly proposed block is broadcast to the entire network. If all transactions in this new block are legitimate and have not already been spent, the other miners will approve it.

The problem of “determining representation in majority decisions” is solved by PoW, as stated in the Bitcoin whitepaper.

“Proof-of-work is one CPU, one vote.” The longest chain, into which the most proof-of-work effort has been invested, represents the majority decision. The honest chain will experience the fastest growth and outperform all competing chains if honest nodes control a majority of the CPU power. 

The Bitcoin whitepaper states that to alter a previous block, an attacker would have to recreate the proof-of-work for the block and all subsequent blocks, and then overcome the work of the honest nodes.

Advantages of Proof-of-Work

• Established and proven: PoW is the first consensus mechanism used in cryptocurrencies. Bitcoin has been functioning as a Proof-of-Work (PoW) blockchain for almost 15 years.
• Proven Security: In the cryptosphere, PoW is considered the most secure consensus mechanism. A living proof of this claim is Bitcoin. The Bitcoin blockchain has never been the subject of a cyberattack. The Bitmain S9 mining machines, which were among the most popular at the time of writing, were estimated to cost over $20 billion to perform a 51% attack on Bitcoin for one hour, according to a February 2024 research report.
• Decentralization: According to experts, established PoW crypto networks have the potential to become more decentralized than PoS cryptocurrencies. PoW mining requires an immense amount of electricity and computing power. Centralizing forces are unable to manipulate a large proof-of-work blockchain like Bitcoin due to the high investment costs.

Disadvantages of Proof-of-Work

• Energy Usage: PoW’s excessive energy consumption has been heavily criticized by environmentalists and lawmakers around the world. According to the Cambridge Centre for Alternative Finance, Bitcoin’s annual energy consumption exceeds that of several countries, such as Egypt, Malaysia, and Poland.
• Bulky equipment: Bitcoin mining equipment is very bulky and requires storage and maintenance in large data centers.
• Noise Pollution: It is claimed that large-scale Bitcoin mining operations cause noise pollution in the surrounding area. Bitcoin Magazine reports that a single Bitcoin mining machine produces a sound level of 70 to 90 decibels (dB).
• Barrier to entry: The fierce competition in the Bitcoin mining industry has increased the barrier to entry due to high capital costs and operating expenses. It is no longer feasible to mine Bitcoin using CPU chips. Most miners use specialized ASIC mining rigs.

What is Proof of Stake?

Proof-of-Stake is an encryption technique adopted by crypto networks such as Cardano (ADA) and Ethereum (ETH).

Similar to PoW, PoS is intended to facilitate consensus among decentralized network participants about the state of a blockchain. However, PoS’s encryption technology differs from that of PoW.

In a PoS blockchain, miners are replaced by validators. Validators do not have to spend computing power to solve complicated puzzles. Each validator is required to deposit a certain amount of crypto tokens into a smart contract, which is called “ staking ”.

The deposit serves as collateral and guarantees that the validators fulfill their obligations transparently.

New blocks are generated by a random selection of validators. The network is notified of the newly proposed segment. The other validators are responsible for checking the validity of the proposed blocks and confirming the proposed block.

For a block to be completed, votes representing at least two-thirds of the cryptocurrencies used are required.

Aside from Ethereum, many other projects utilize the Proof-of-Stake consensus mechanism, including some meme coins such as Base Dawgz.

Advantages of Proof-of-Stake

• Low energy consumption: PoS blockchains do not consume as much energy as PoW blockchains. The Ethereum Foundation has reported that the transition from PoW to PoS resulted in a 99.95% decrease in energy consumption.
• Low barrier to entry: Validators can stake on PoS blockchains from their laptops. There is no need for special hardware. By delegating their tokens to validators, token owners can also participate in staking.
• Scalability: PoS blockchains are more scalable than PoW blockchains because validators are not required to solve complicated puzzles during the chain validation process. The modern architecture of PoS chains allows for the integration of additional functionalities to achieve higher throughput and lower fees.

Disadvantages of Proof-of-Stake

• Less Secure Than PoW: Critics of the PoS consensus mechanism claim that the low barrier to entry to become a PoS validator increases the risk of centralized forces and bad actors gaining control of the network, making it less secure than PoW.
• Less equal: Proof-of-Stake (PoS) chains allocate a larger amount of voting power to validators who have staked a larger number of cryptocurrencies. A blockchain’s ecosystem is significantly impacted by proposals to change its protocol.
• Less proven system: PoS is a newer system than PoW, which means it has not been exposed to as many unforeseen attacks.
• Slashing: Validators who have staked cryptocurrencies on PoS chains are at risk of losing their deposits through slashing.

Proof-of-Stake or Proof-of-Work: Which is Better?

There is no easy answer to this question. PoW and PoS systems have different advantages, disadvantages, and market statements.

For example, Ethereum and Bitcoin. Bitcoin is widely considered to be the most secure and decentralized cryptocurrency in existence. Although this PoW blockchain is not as feature-rich or as fast as modern PoS chains, its predictable inflation rate and store-of-value properties have made it the most popular crypto investment.

Meanwhile, Ethereum is positioned as a global decentralized app store. Ethereum’s transition to Proof-of-Stake has enabled the blockchain to achieve a higher level of scalability than its PoW counterparts.

Most investors hold portfolios that include both PoW and PoS cryptocurrencies, including BTC and ETH, due to their different value propositions.

ADVT. 

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