Proof of Work vs. Proof of Stake

November 28, 2022

Introduction

Let’s make an imagination exercise: think of blockchain as a human body. 

Naturally, every organ operates in a consensus mechanism with all the others, so the entire organism functions accordingly in all life processes. That's the case for the blockchain, too; a protocol is needed. This protocol will specify how users interact with each other in this globally distributed network, which is the block selection process, how the network nodes validate transactions, and, not least, how the network incentivizes the integrity of the participants.

There are several types of consensus mechanisms in the blockchain space that protect the networks against Sybil attacks and ensure the validity of transactions. In this article, we will analyze the most significant ones: Proof of Work and Proof of Stake.

POW involves solving complex mathematical problems in order to validate transactions using powerful computers (mining rigs). In contrast, POS uses validators that process transactions and secure the network using significantly less computational power due to different consensus mechanisms.

Don’t get scared of the length of this article. It’s easy to go through it. Everything it’s categorized on all the key points you need to know. But if you still want to know more after reading it, we are happy to answer all the tangled-up thoughts you might have about this topic. 

Get comfortable on your couch, office chair, or subway seat, and enjoy!

The Merge: Why it’s important to look at it?

Before diving into that, let’s make a short insertion here to understand the subject holistically. Let’s talk about The Merge!

What’s that? It’s the recent transition of Ethereum from Proof of Work to Proof of Stake (September 15, 2022). Ethereum is the most widely used blockchain and one of the most popular ones. The Merge was planned a long time ago and has always been part of their roadmap, but only materialized this fall.

The POW secured the Ethereum network from Genesis (July 2015) until The Merge (September 2022). A new era began. This significant development implies that stakers become the validators of the blockchain. Therefore, miners are no longer needed. Instead, validators have now the responsibility of processing the validity of all the transactions and the creation of new blocks.

The most substantial reasons for the switch? The Merge was a strategic move in line with Ethereum’s vision, to bring more scalability, security, and sustainability to its blockchain. Thus, the energy consumption is considerably reduced (by an estimation of  99.95%), is more environmentally friendly, and has increased security.

A note to remember

If one of the most popular blockchains is switching from POW to POS, it’s time to look at both consensus mechanisms with more attention and understand the differences. 

It should be noted that both consensus mechanisms have a way of how nodes coordinate to agree on the validity of transactions and how the network functions. 

PROOF OF WORK

How it works

Proof of Work is a consensus mechanism in which computing power is used to verify cryptocurrency transactions and secure the blockchain. This model uses miners who implement the mining process - the trial-and-error operation for solving a cryptographic equation regarding the candidate block.

The miners are in constant competition with each other for who unravels the problem first. So, for every “mathematical puzzle”, there are a lot of miners who try to solve it at the same time. And the only way to do that is by making an enormous amount of trials and guessings until it’s done. So a miner will test different unique values (also called nonces) until it finds the correct one. 

And you know what they say; the winner takes it all! The one who finally solves it first announces the good news to the entire network, in order for them to verify his work. After that, it has the authority to add a new block of transactions and get an afferent reward - like crypto remuneration for good work!

Technically‌, the mining process is like backward hashing. The purpose is to determine a number lower than the hash of the block, in order to be accepted. This is also named the target hash. The problem gets harder and more difficult to be solved, as the target gets lower.

Users detect tampering in practice through hashes and long strings of numbers. Adding more computational capacity to the network means making the calculations more difficult. Therefore, the costs of creating new blocks increase as well. That’s why the miners need to improve the efficiency of their mining process in order to maintain a positive economic balance.

Advantages of PoW

Resistant to 51% attacks

It’s one of the most popular Sybil resistance consensus mechanisms. Ok, let’s translate that. A Sybil resistance mechanism implies the protection of a blockchain network against Sybil attacks, such as spam nodes or 51% attacks.

This consensus mechanism already proved its great capacity for keeping a secure and safe decentralized network for the significant PoW blockchains. It has been battle-tested throughout crypto history. So… we have a proven high level of security for PoW.

Tremendous costs would be needed in order to perform a 51% attack on an established PoW blockchain. Due to massive energy consumption, it would be more expensive than earnings. That’s why it’s (almost) impossible for a bad actor to perform a malicious behavior in the network. But the challenge is still on for the smaller PoW blockchains. 

Decentralization

Another advantage of a PoW blockchain is decentralization. Miners operate from locations spread all around the globe. Nevertheless, it is considered that due to the enormous powerful computer systems, the mining pools might be in control of the operation, causing centralization.

Easy to verify the solution

Even if it’s hard for miners to solve the equation, it’s really easy for the community to verify the correctness of the solution when a miner finds it. Trustworthiness - CHECKED! 

Disadvantages of PoW

Massive energy consumption

A long time ago, when the problems to be solved weren’t as difficult as they are today, the mining process didn’t imply using high-powered computers. Well… it’s not the case anymore!

Hence, Proof of Work requires now the use of a significant amount of electricity. There are even some studies that affirm that only Bitcoin miners use just as much energy as Switzerland. However, a part of it is renewable energy.

When you think about it, a lot of this energy is quite wasted, as only one miner resolves the equation, therefore all the others consume the energy with no win. 

These things contribute to emissions, pollution, and other harmful local footprints. 

Time consumption

The mining process takes time… just as the good outcomes in life, right? But when such a matter is at stake, the trial-and-error process might take too long. Consumed time could be one of the biggest drawbacks of a PoW blockchain. Not to mention the low transaction speed. 

Vulnerable to physical attacks

And it’s not only that. PoW uses great specialized equipment, which sometimes it’s huge, and with advanced hardware. Picture some enormous machines. They are impossible to hide. This can be a great disadvantage, as Pow is rooted in the physical world so quite vulnerable to physical attacks.

Heat Management

As you would expect, these gigantic computers work on and on, with no time off. No doubt that without an effective cooling system, the whole gear would break in no time. 

High costs & resources

Specific quality equipment, checked. Cooling system, checked. Misspent time, checked. Plenty of space, checked. A LOT of invested money, checked. Expensive fees in the network, checked. All in one, PoW requires considerable resources. 

Scalability limitations

As scalability is one of the three main components of a blockchain trilemma (decentralization, security, and scalability), it’s mandatory to look at it with a serious gaze. This is a whole subject itself, so we’re going to analyze it in more detail in another article. But it’s important to note here that a PoW blockchain has a hard time maintaining some things: the small (1MB) block size which cannot sustain a high number of transactions, the slow transaction time, etc.

The result? 

Even if Bitcoin was one of the first blockchains that used this consensus mechanism, and still uses it today, it’s not sustainable anymore in the long run. There are quite a lot of drawbacks to a Proof of Work system, so a lot of other blockchains operate on more efficient alternative consensus mechanisms, such as Proof of Stake.

PROOF OF STAKE

How it works

Proof of stake (PoS) does not use computer power to solve mathematical equations. Instead, it requires network participants to stake the network’s native asset to achieve distributed consensus. Entirely virtually.

Ok, let’s take it step-by-step. Proof of Stake is a consensus mechanism for a blockchain. Many see it as a better alternative to PoW, as it’s environmentally friendly and doesn’t use the massive energy power that PoW does.

If in the PoW mechanism, we had miners who were in charge of the mining process, in PoS, we have validators, minting, and staking.

In order to authenticate transactions and achieve distributed consensus, and eventually create a new block, the participants in the network have to pledge a stake. That means that they need to block their coins in the ecosystem in the form of a stake, into a smart contract. It’s like putting them on hold somewhere. Because they stake their coins, they make the network secure. 

The probability of a chosen validator is determined based on various combinations of random selection. But the process is not entirely random. There are better chances for a validator to be chosen if it has a higher amount of staked coins and for a longer time (coin-age-based selection). More chances, more power in creating new blocks. And, of course, bigger rewards in the form of network fees. This selection algorithm also includes a random process, in order to make it fair to all participants in the network. 

The validators bet on the best blocks they consider worthy of being added to the blockchain. When a new block is added, validators receive a reward proportional to the stake. 

If a validator approves a fraudulent transaction, and the other nodes don’t approve the block, the validator loses the entire staked amount and it’s marked as a “bad” validator by the algorithm. Depending on how serious the validator's behavior is, a partial punishment - named slashing - can be applied to him.

Let’s dive into the advantages of this consensus mechanism!

Advantages of PoS

Proof of Stake was created and designed as an alternative to the Proof of Work consensus mechanism. It aims to resolve the main issues of PoW and to satisfy the blockchain trilemma. 

Energy efficiency


As the significant electricity used by the PoW mechanism is at the core of every discussion in this matter and a principal factor of criticism of cryptocurrencies, it’s good to know that PoS uses MUCH LESS energy.

PoS doesn’t need such powerful computers to run 24/7, therefore there’s less energy consumption. No competition among validators, therefore a lower load on blockchain.

Decentralization

At the hardware level, staking is more decentralized than mining. Why? Because it’s super easy to run it from a normal device (like your personal laptop or mobile) that doesn’t require powerful hardware equipment. Thus, everyone around the globe can secure the network and stake their coins easier, making the network decentralized. 

Security

First, let’s talk about the validators. They run the nodes that secure the network. Let’s say that this unlocks the possibility for them to attack the network. But, there is a but… If a validator attempts to damage the network, it’s really easy for the others to see this and not give their “OK” on the block. Things are getting worse for the bad validator. Not only does it lose all the staked amounts, but it could also be banned from further validation processes by the other honest validators. 

Secondly, it’s quite impractical, really expensive, and nearly impossible to attack the network in a PoS system. The attacker wouldn’t need to have 51% of the processing power like in PoW, but over 50% of the total cryptocurrency in that network. Know what that means? That it needs to buy over half of the cryptocurrencies in the network. It’s simply too expensive. That is if there are sufficient coins left to buy. And even if, let’s say, the bad validator gets to this point, it would be no benefit for it to spend all the money for nothing. In PoS, the attacker has all the chances of being attacked by the network. 

Scalability

When we say scalability, we refer to processing power, blockchain performance, and efficiency. Thus, proof of stake has faster and more secure transactions with lower fees and less used energy. Also, the blocks are approved quicker than in PoW. 

Faster Transactions

There is a faster way of validating the transactions in a PoS blockchain, which dramatically increases the speed of transactions. 

Resistant to Censorship 

Because PoS blockchains are fully digital, they don’t need enormous spaces for depositing mining equipment. Thus, it doesn’t have a hostile regulatory climate. 

Costs efficiency

No expensive hardware, more money in the pocket. So much yes! We’re on the same page here, right?

Ecological & Carbon footprints

Last, but not least, Proof of Stake has fewer environmental effects and carbon footprints due to less energy consumption. 

Disadvantages of PoS

Although Proof of Stake enjoys a lot of advantages, it might have a few disadvantages, too. It all depends on the network! 

Validators with large holdings

If a validator has a significant share of the nodes in the network, it has a better chance to be selected more frequently to verify the transactions, which leads to outsized influence and higher earning rewards. In time, this could lead to centralization. 

New technology
Proof of Stake is like a teenager compared to the mature Proof of Work. It’s younger, and it has undoubtedly fewer “life experiences”. So it didn’t prove its full capacity, yet. It still has flaws and is in the process of fixing them.  

The ‘Nothing at Stake’ problem

Block creators, therefore the validators, might not have anything to stake when a fork occurs in the blockchain. 

Accessibility Limitations

This doesn’t mean that’s a very complicated system, and it’s hard for anyone to participate. No. It only means that you need to own native cryptocurrencies in a blockchain. You can do that either by buying crypto with fiat or by exchanging some coins with the needed and compatible coins. It's still cheaper than owning specialized hardware, right?

CONCLUSION

Proof-of-Work and Proof-of-Stake are one of the most significant consensus mechanisms used by most blockchains. Each one has pros and cons. But taking into account that Proof of Stake is more efficient, more scalable, and with less energy consumption, we bet on it. Ethereum did it too. 🙂

If you want to get acquainted with another Proof of Stake blockchain, consider MultiversX (previous Elrond Network, maybe it’s still more familiar to you). Since the announcement at X Day, we're calling it MultiversX). It has operated on a Secure Proof of Stake mechanism since the Mainnet Launch (July 2020) and it’s a highly scalable, fast, and secure blockchain. Moreover, it has negative carbon emissions and can process over 15.000 transactions per second (they even reached 260.000 TPS in tests). Just remember, Ethereum can perform 20 TPS and Bitcoin 7 TPS. Not to mention that MultiversX has a tremendous amount of validators (3200) that ensure the security of the blockchain.

KEY TAKEAWAYS

► Proof-of-Work and Proof-of-Stake are the most popular consensus mechanisms. 

► PoW involves solving complex mathematical problems in order to validate transactions. The process is called mining.

► In PoW, miners are competing against each other and only one of them wins and takes the reward.

► PoW has been roughly battle-tested throughout crypto history and has proved that it’s secure.

► PoW has a few significant disadvantages, the greatest one is the massive energy consumption. 

► Proof of Stake (PoS) was created as an alternative consensus mechanism to Proof of Work. 

► Besides the needed hardware part, PoS is purely digital, and it operates globally, in a decentralized and eco-friendly approach. 

► In PoS, we have validators, minting, and staking.

► PoS uses validators that process transactions and secure the network.

► PoS doesn’t need powerful computers and can run from a normal device everywhere around the world. 

NICE TO KNOW

► 6.25 bitcoins. This is how much a miner gets at the moment for mining a block until 2024 when the next halving period begins. After that, the block reward will fall to 3.125 BTC per block.

► Miners create a new bitcoin block every ~10 minutes.

► Proof of Work was created in order to combat spam emails and other service abuses. 

► Created in 1993,  “Proof of Work” got its official name in 1997, but only became popular with Satoshi Nakamoto’s famous A Peer-to-Peer Electronic Cash System paper.

► The Bitcoin blockchain uses the hashcash POW (SHA256) function as the mining core, so specialized devices (ASIC miners) are being used to mine, due to the higher difficulty of mining.

► In times of the bull market, PoW blockchains usually have gas spikes, making transactions more expensive.

► The most commonly known Sybil attack for all blockchains is the “51% attack”.

► The word “Sybil” comes from the pseudonym name of a woman who received treatment for dissociative identity disorder.

► In the MultiversX (Elrond) blockchain, a validator is randomly chosen to create a new block every 6 seconds.

► When all the participants in the network agree on a transaction, they are Byzantine Fault Tolerant (BFT). The concept of BFT comes from the Byzantine General’s Problem, a game theory problem that describes the challenge of achieving consensus between decentralized parties, without relying on a trusted central party. A coordinated attack is needed in order to achieve victory. They lose if they don’t have a coordinated attack and strike at different times. 

► PoW cryptocurrencies: Bitcoin (BTC), Litecoin (LTC), Dogecoin(DOGE)

► PoS cryptocurrencies: Ethereum (ETH 2.0), Elrond (EGLD), Cardano (ADA), Algorand (ALGO), Polkadot (DOT), Solana (SOL).

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