Proof of Work vs. Proof of Stake

Published:

The concepts of Proof of Work (PoW) and Proof of Stake (PoS) are rooted in cryptography. Cryptocurrencies like Bitcoin and Solana emerged from these concepts, and the global financial sector hasn’t been the same since. 

Rather than relying on centralized banking systems to validate transactions, the PoW and PoS technologies introduced new decentralized techniques for ensuring data consistency.

They both run on blockchain technology where participants compare ledgers to validate transactions. However, they are different in some aspects such as how validators (miners) are selected. This specific difference alone is so wide that proof of stake networks consume less than 0.001% of the energy the Bitcoin proof of work network consumes.

What is proof of work, what is proof of stake, and how are they different? Keep on reading as we answer these questions, including why energy consumption is an important factor.

The consensus mechanism

To understand both proof of work and proof of stake, we have to first dive into what's known as a consensus mechanism. A consensus mechanism is a means for validating transactions within the blockchain. What's the blockchain?

The blockchain

The blockchain is a network that runs on a distributed ledger system —- a system where a single ledger contains all transactions completed on the network. The records in the ledger are available to everyone publicly and are also immutable (i.e., they cannot be changed or tampered with).

When a transaction occurs, it gets added to a block. A block can house over 2,000 pending transactions, containing pieces of transaction information like.

  • Timestamps
  • The sender and receiver's address
  • Digital signatures, among others

It also contains the previous block's hash. With the previous block's hash, the new block is linked to the previous transactions recorded on the ledger, creating an interlinked chain of blocks, hence, the «blockchain”.

Where the validation mechanisms come in?

Now, one thing about public blockchains is that anyone can also participate in it. This participation is in the sense that anyone can help validate transactions and update the chain or ledger with a new block. Participants are what we know as validators, nodes, or „miners”. However, to prevent malicious blocks and double-spend problems, the consensus mechanism is introduced.

Consensus mechanisms validate blocks

The blockchain consensus mechanism is a way of validating the new block against previous blocks. Once a candidate block is offered to be added to the ledger, all nodes compare information in it against previous blocks. They come to a consensus to determine if it is valid or invalid. Once seen to be valid, the block is then added and the ledger is updated.

Blockchain proof of work and proof of stake are two of the most popular consensus mechanisms used in the cryptocurrency space. Although there are similarities between them, their modes of operation make a huge difference.

What is Proof of Work (PoW)?

Proof of work (PoW) is a consensus model that requires participants to solve complex mathematical puzzles. The first validator to solve this puzzle gets to add the block to the ledger and receive rewards, including the transaction fees.

The process of solving this mathematical puzzle is the “work» of the validator. Also, rewards are given as incentives for participation, as the mechanism requires a lot of participants to remain secure. The more validators in the PoW network, the more secure and immutable it is.

The Bitcoin and Litecoin networks run on the PoW consensus model. Although not the first of its kind, Bitcoin is the pioneer Proof of Work cryptocurrency.

Proof of Work Background

Proof of Work started from an idea byCynthia Dwork and Moni Naor in 1993. They intended to introduce a new way to stop email spam and denial of service (DDOS) attacks by increasing computing times. Adam Black built on this idea in 1997 and developed a Hashcash algorithm for sending emails. This algorithm required a mail to contain a valid string of alphanumeric characters —- called a hash.

In 2004, Nick Szabo wrote the "Theory of Collectibles" and Hal Finney integrated this idea with digital tokens. In what he called a «reusable proof of work», Hal utilized a secure hash algorithm (SHA-1) that required an entity to solve computational problems to validate and add blocks into a database. The computation to validate this transaction remained reusable and the management of computation keys was done by a centralized server.

Around 2009, Satoshi Nakamoto introduced the PoW mechanism we know today. Through the Bitcoin blockchain, Satoshi introduced the first PoW consensus model that eliminated the need for a centralized entity. This was also the first decentralized, autonomous PoW mechanism that eliminated the risks of double spending with digital currencies.

How does Proof of Work work?

The Bitcoin blockchain is a great proof of work example to show how it works. There are four integral and distinct parts of the PoW system:

  • The Workers (miners)
  • The Hash
  • The Nonce
  • The Reward

The Workers (Miners)

The workers are the nodes or validators within the blockchain. They create and validate new transaction blocks within the network — which we know as candidate blocks. Every candidate block contains 1MB of data (block size), which can be equivalent to containing over 2000 pending transactions.

The consensus mechanism kicks in from here. All nodes in the network validate the information in the candidate block against previous valid blocks. The block is then closed.

The Hash

The blockchain generates a hash using information in the closed block and a set of randomly-generated numbers called the Nonce. The hash in the Bitcoin network is generated using a Proof of Work algorithm called the SHA-256 function.

The Nonce

A nonce stands for «Number Used Once» and is used to gamify the validation process. Remember there's a reward, but only one miner gets to receive this reward.

The algorithm uses the random nonce to create a new hash from the publicly available transaction information. Miners or «workers» then try to guess this new hash using their own nonce.

The Reward

Guessing the hash involves using a nonce equal to zero and increasing it by 1 until the miner gets a valid result. Every miner works this way and the first miner to guess the hash —- i.e., solve the complex mathematical problem, receives the blockchain reward and transaction fees.

In the case of Bitcoin, the reward is equal to 6.45 bitcoins plus transaction fees and is cut in half after every 210,000 valid blocks. Halving is estimated to occur every 4 years, and rewards are projected to end by the year 2140. By this time, miners will only receive transaction fees from successfully validating blocks.

Also, a «miner» doesn't have to be a single individual. Multiple individuals can pool computing resources together to mine a single block and then share rewards when successful.

We see that the Proof of Work mechanism works like any other blockchain consensus mechanism. The main distinction, however, is in choosing who gets to add the new block to the ledger and receive rewards.

Pros and Cons of PoW

Based on how it works, we can identify several advantages and disadvantages of the PoW system.

Pros of Proof of Work

  • Decentralized verification
  • High-level security thanks to the high number of participants. Although a malicious entity can corrupt the blockchain by having control over 51% of all nodes around the world, this is virtually impossible to achieve.
  • Rewards for Proof of Work mining

Cons of Proof of Work

The major downside to the PoW system is that the mathematical problem requires huge computing resources. Miners compete to solve the puzzle first, forcing them to employ high-powered computing rigs and, hence, consume a lot of energy.

Bitcoin alone is estimated to consume 113 Terawatt Hours (TWh) a year. This, however, is still less than half of the traditional banking sector at 263 TWh per year. The mechanism also comes with the following disadvantages

  • Relatively slow transaction speeds, as blocks are added (transactions confirmed) after about 10 minutes
  • Expensive barrier of entry for miners

Best use cases for PoW

The most optimal use case for the proof of work mechanism is to eliminate the need for third parties in peer-to-peer interactions. This has proven useful in financial transaction processing. It helps to achieve the following:

  • Keep distributed ledgers consistent across all validators
  • Maintain a sequential record of transactions
  • Secure a database against corruption

The key takeaways about Proof of Work

So, in summary, what is Proof of Work all about?

  • Proof of Work is a gamified means of validating blockchain transactions. It involves miners validating blocks of transactions and competing to solve a mathematical problem/receive rewards.
  • Bitcoin is the most popular and comprehensive proof of work blockchain today. Created by Satoshi Nakamoto, it introduced the first decentralized PoW mechanism and, today, boasts of over one million miners within its network.
  • The PoW system uses up a lot of energy and computing power, making it undesirable for green energy initiatives.

What is Proof of Stake (PoS)?

Proof of stake is a consensus model that selects a validator at random to write the next block and receive transaction fees. Rather than solving cryptographic puzzles, PoS involves participants staking their coins for a chance to validate a block. Staking is similar to offering coins as collateral, and the higher the amount of coins staked, the higher the chances of the node getting picked.

Proof of Stake Background

In a bid to solve the energy consumption problem of the PoW mechanism, Sunny King and Scott Nadal wrote a paper introducing Proof of Stake in 2012. Their concept used staking to replace competitive problem-solving.

However, it faced concerns around these aspects:

  • Inequitable coin distribution
  • Reward monopolies
  • Malicious control of staking power (51% loophole)
  • Nothing-of-stake (NoS) scenarios that permit double-spending.

In 2013, Sunny King launched Peercoin (PPC), the first PoS blockchain with a native cryptocurrency of the same name. It introduced concepts like coin age (more power to older staked coins) to stop monopolies, and checkpoints to prevent NoS attacks. However, PPC still worked with PoW mining concepts to support coin distribution.

Blackcoin (BLK) then came in 2014 built on a pure proof of stake concept. It solved the risks around coin age as seen with the PPC chain.

In PPC, the value of older staked coins meant holders could carry out an attack with lower than 51% of staking power. Coin age also discouraged participation by new holders in validation processes, making the chain less secure. Blackcoin replaced it with a fair distribution period with no mining involved.

Since Blackcoin, more elaborate and highly adopted PoS chains have entered the space, two of the most popular being Solana and Ethereum.

The Switzerland-based Solana Foundation launched its PoS blockchain in 2017 and Vitalik's Ethereum moved from Proof of Work to Proof of Stake in September 2022.

How does Proof of Stake work?

As seen from their background, crypto Proof of Stake blockchains have different ways of working. Nonetheless, we will use the Solana blockchain and excerpts from Ethereum Proof of Stake to form a general understanding of how POS works.

There are two main factors within the PoS system:

  • Validators
  • Staking

Validators

Validators are the nodes that check the correctness of data in a block of transactions. On Solana, once a block is up for confirmation, over 3,400 validators vote on whether data in it is valid or not. When validators reach a majority consensus on the accuracy of the candidate block, the block is added to the ledger and made a permanent part of the blockchain. .

Staking

Now, the amount of coins staked by a validator node determines the levity of its vote on the confirmation process. In the case of Solana, this simply means that the more SOL a validator stakes, the more power in validating a block. It also has a higher chance of receiving rewards for validating a block.

Both Solana and Ethereum feature staking pools where token holders delegate their coins to a validator node operator. This doesn't give the node control over the tokens but, rather, increases its stake-weighted power in validating blocks. Rewards given by the blockchain are then shared between users who delegated their tokens.

You need to stake at least 32 ETH to qualify as an Ethereum validator. Solana, on the other hand, doesn't have a minimum stake amount for you to meet. The way a blockchain chooses validators also differs. While there's a general form of randomization, some chains still give preference to older staked coins, just like with the PPC chain.

There are also punitive measures where an attempt to validate malicious blocks causes the burning of staked tokens. This limits the desire of malicious players and the likelihood of NoS scenarios.

Pros and cons of Proof-of-Stake

Proof of stake comes with a couple of advantages, but not without disadvantages. Here are the most important pros and cons.

Pros of Proof of Stake

  • Low energy consumption, making it an eco-friendly and future-proof consensus mechanism
  • Investors can stake idle crypto assets to generate passive income.
  • Faster transaction processing. This advantage is clearly seen with Ethereum which achieves 100,000 transactions per second with PoS, compared to a miserly 30 transactions per second with PoW.

Cons of Proof of Stake

  • The 51% stake risk still applies, although it is deemed highly impossible to achieve. Nonetheless, this makes PoS networks to be deemed theoretically weaker than PoW networks.

Best use cases for PoS

Proof of Stake proffers the same use cases as Proof of Work. It comes with a decentralized structure that permits participants to autonomously validate financial transactions and receive rewards in the process.

In finance, it can help to achieve the following:

  • Encourage passive investment in financial services
  • Maintain a secure, immutable database
  • Incentivize community engagement for long-term relevance

The key takeaways about Proof of Stake

Proof of Stake in summary:

  • Proof of stake is a consensus mechanism that uses staked coins to select a validator, instead of using puzzles or «work». Although validators are chosen at random, the amount of staked tokens increases a node's chances of getting selected
  • Solana and Ethereum are the most popular Proof of Stake blockchains, with the latter only recently switching from PoW at the end of 2022. Cardano (ADA), Avalanche (Avax), and Cosmos (ATOM) are some other PoS chains enjoying a buzz of attention today.
  • Although it helps save energy, there is a drawback about PoS called the 51% stake risk. A validator that controls more than 50% of staked tokens can approve a malicious block and corrupt the blockchain. However, this is highly impossible to achieve.

Proof of Work vs Proof of Stake

As we have seen from above, Proof of Work and Proof of Stake are two transaction validation mechanisms.

They both support a cryptocurrency market worth over$1.6 trillion today. Nonetheless, while one comes as a pioneering technology in cryptography, the other seeks to improve blockchain implementations and reduce wastage.

Here are the top differences as the similarities between Proof of Work and Proof of Stake.

Key differences between POW and POS

We look at 5 important differences between Proof of Work and Proof of Stake consensus mechanisms

1. Block Validation and Writing

The method of validating blocks differs between the two mechanisms.

Proof of Work involves an autonomous consensus validating a block, and then a gamified system to choose who writes the block and receives rewards.

Proof of Stake, on the other hand, involves staking tokens and then voting on which block to write to the blockchain. The validator with a higher amount of stake has higher voting power and a higher chance of receiving rewards.

2. Energy Consumption

Proof of Stake uses significantly lower amounts of energy than Proof of Work. Ethereum presents a perfect example. While Etherum used to consume about 44.13 TWh of energy per year with PoW, the switch to PoS in 2022 reduced the energy consumption to about 0.0026 TWh per year.

3. Participants

Participants on the PoW systems are known as «miners», while participants in PoS systems are known as «validators».

4. Resource Requirement

High computing resources are expended in a PoW system due to the competition for block rewards. PoS, on the other hand, requires a lot of staked coins, given the stake-weighted means for choosing validators.

5. Rewards

With Proof of Work, miners receive block rewards ingrained into the block they validate. With Proof of Stake, validators earn transaction fees as rewards for validating a block.

Key similarities between PoW and PoS

These are the top similarities between the two consensus mechanisms

1. Consensus Nodes

Both PoW and PoS require (a lot of) validating nodes in the network to remain secure. They both operate on a distributed ledger system where every node must reach a valid consensus on the candidate block before it can be added to the chain.

2. Incentives

Both PoW and PoS offer incentives to validating nodes that either solve a problem or have high-valued stakes.

3. Resource Pooling

Although they both use different resources, PoW and PoS systems allow for resource pooling. In PoW, miners pool computing resources to solve the puzzle and share block rewards. With PoS, users delegate tokens to a validator node (pool) and share from transaction fees (rewards).

Proof of Stake vs Proof of Work summary

Proof of WorkProof of Stake

Requires solving mathematical puzzles (work) for a chance to write the next block

Requires staking tokens for a chance to write the next block

Participants are called Miners

Participants are simply known as validators

Requires high computing power and uses a lot of energy

Requires low computing power and is energy-efficient

Incentives come in the form of block rewards and transaction fees

PoS validators receive transaction fees as rewards for adding a block

Competitive edge to sharing rewards

Randomized edge to giving incentives

Slow transaction processing

Fast transaction processing time of up to 100,000 transactions per second

Highly secure due to difficulty guessing a hash

Theoretically exploitable when a validator has 51% stake power. Although this is deemed impossible in practice.

PoS vs. PoW FAQs

How do you earn with Proof-of-Stake?

You have to stake native coins on the blockchain to qualify as a Proof of Stake validator. While Ethereum requires staking 32 ETH to be a validator, Solana and Cardano don't have a minimum amount of coins to stake.

Is Proof-of-Stake a certificate?

Proof of Stake is not a certificate and doesn't get you a certificate. It is only a consensus mechanism to secure blockchains.

Can Bitcoin utilize Proof-of-Stake consensus?

Yes, Bitcoin can be changed to PoS. However, this requires a lot of planning, time, and consensus from its maintainers and miners.

Which top cryptocurrencies use PoW?

Bitcoin (BTC) is the pioneer Proof of Work crypto and, at over $800 billion, has the highest market cap of all. Other top Proof of Work cryptocurrencies are Dogecoin (DOGE), Litecoin (LTC) and ERGO (ERG).

Which top cryptocurrencies use PoS?

Ethereum (ETH), Solana (SOL), Cardano (ADA), Polygon (MATIC), Celestia (TIA) and Injective (INJ) are six PoS cryptocurrencies with some of the highest market caps and adoption.

Which is better between Proof of Stake and Proof of Work?

Both PoS and PoW systems have their strengths and weaknesses, so there is no general agreement on which is better. Nonetheless, PoS boasts faster transaction processing time and helps save more energy.

407
No comments yet. Be the first to add a comment!
Our site uses cookies