Proof of work and proof of stake are both consensus models which are used to keep blockchain networks secure. While they both use different mechanisms to do this, the fundamentals are the same. Both consensus models work by only allowing certain genuine participants to add to the blockchain.
The difference between proof of work and proof of stake lies in how they establish who these genuine network participants are. Proof of Work uses energy to establish authenticity whereas proof of stake uses money.
Both models are used in successful blockchains, and each has its advantages and disadvantages. Here, we’ll ask which is better, proof of stake vs proof of work, what is the difference, and establish which is better.
What is Proof of Work
Proof of work (PoW) blockchains use a consensus model which uses computers to solve complex mathematical problems. The computer (or “node”) which solves the problem first gets to validate the next block in the chain.
The mathematical problems involved make use of cryptographic principles which require powerful computers to solve the problems in a timely manner. This means, generally, the more powerful your computer, the more problems you can solve.
The process is known as “mining,” and those who engage in the activity as “miners.” Miners dedicate their computational resources to securing a blockchain for multiple reasons, the main being it is financially rewarding. Running the blockchain’s node software rewards miners with cryptocurrency in return for helping secure the network.
- Transactions are batched together into a “block.”
- Miners race to solve mathematical problems.
- The first to solve the mathematical problem earns the right to process the new block.
- The miner is rewarded, and the blockchain is updated.
Proof of work is not a new concept and has been around for around 30 years but has been made better known by Satoshi Nakamoto and the creation of Bitcoin in 2008. Nakamoto employed a proof of work system to allow transactions to be verified without relying on third parties.
While most blockchains have moved away from PoW, the two biggest, Bitcoin and Ethereum still use the consensus model, as well as Litecoin and Dogecoin.
Pros of Proof of Work (PoW)
The main advantages of PoW revolve around the difficulty bad actors have in abusing the blockchain.
The extensive amount of computational power needed to process transactions ensures the network remains secure. Manipulation of the network would require an almost impossible amount of resources, specifically, more than half of the total processing power.
PoW models are based on “distributed consensus” which simply means a large group of separate entities agreeing despite being geographically separated. This prevents single parties or individuals from dictating the direction of the blockchain and undermining the trust of the network.
Low barrier of entry
Bitcoin and Ethereum nodes can be run by almost any computer. While the better your hardware, the more likely you are to solve the mathematical problems, even the humblest hardware is somewhat rewarded for its contribution.
Disadvantages of Proof of Work (PoW)
Proof of work uses a lot of energy to perform the necessary computational tasks and verify transactions. This energy expenditure is a vital component of PoW models and is (partly) what gives a cryptocurrency such as Bitcoin value. Unfortunately, as blockchains such as Bitcoin and Ethereum have grown, so has concern for the emissions and effect on the environment this energy usage is having.
In fact, a study by the EIA (https://www.eia.gov/tools/faqs/faq.php?id=97&t=3) has shown that mining a single Bitcoin uses the same amount of electricity as a typical U.S. household does in 13 years.
Also known as a “majority attack,” a 51% attack is where a person or group of miners seize control of over more than half a network’s computing power, called the “hashrate.” Holding more than 50% of the hashrate enables the blocking of new transaction confirmation as well as the rewriting of the public ledger. This can lead to “double spending,” where it becomes impossible to prove two people aren’t spending the same digital asset.
The likelihood of 51% attacks is low but theoretically possible. The main reason it is not attempted is the financial costs of seizing control of a network like Ethereum or Bitcoin are almost insurmountable.
As secure as proof of work is, it is also extremely slow. The number of transactions per second (TPS) that Bitcoin can handle is typically less than 10. Ethereum, too, can only handle around 30 TPS which is still a long way short of the practical throughput of traditional payment processors such as VISA, which can handle around 4000.
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What is Proof of Stake?
Largely in response to the energy consumption and low TPS of the proof of work system, newer blockchains opted for a different consensus model, known as proof of stake (PoS).
Proof of stake models uses a process called “staking,” which replaces the role of miners in the PoW system. Rather than having miners compete for the right to process blocks, PoS blockchains choose who gets to create a new block in a deterministic way using algorithms. The more money “staked,” the more likely you are to be chosen as the creator of a block.
Block creators are known as “validators” and are rewarded in the form of cryptocurrency raked from transaction and network fees.
When you “Stake” your cryptocurrency in a PoS blockchain, you lock it up (usually for a set period of time), and it is used to ensure validators have a vested interest in honestly validating transactions.
While anyone can become a validator on such blockchains, most now choose to increase the chance of being chosen as a block creator by joining staking “pools.” These allow those with less cryptocurrency to participate and receive rewards accordingly.
Proof of stake was initially suggested in the Bitcointalk forums by a user called QuantumMechanic as an alternative to the proof of work consensus model. Unhappy with the energy inefficiencies of PoW, users quickly began to see the merit in such an idea which has now resulted in almost all new blockchains opting for staking rather than energy consumption as a way to verify transactions.
While Bitcoin and Ethereum both still use proof of work, they are coming under increasing fire for doing so. Ethereum, however, is now transitioning to a PoS model for both the environmental and network advantages.
There are no plans for Bitcoin to do the same. Nevertheless, with Bitcoin considered the “gold standard” cryptocurrency, there are many who believe the intense energy consumption necessary to “mine” a BTC is what gives it value. In the same way, gold is energy-intensive to extract from the earth, so too with Bitcoin.
Pros of PoS
Resistant to manipulation
Unlike proof of work blockchains, proof of stake makes a 51% attack redundant. If a bad actor were to stake 51% or more of the total currency in order to gain control over the network, then the cost of the coins would increase exponentially at the same time as the supply decreases. This means a 51% attack on a PoS blockchain is financially pointless, with no clear incentive for doing so.
By not requiring anywhere near as much computing power as proof of work consensus models, proof of stake has much lower energy requirements. This means PoS blockchains tend to be a lot greener and better for the environment.
By not requiring validators to solve complex mathematical problems, PoS blockchains can handle a lot more transactions. The TPS of a PoS blockchain, then, tends to be significantly higher. Algorand, for example, (https://www.algorand.com/resources/algorand-announcements/algorand-2021-performance) even proposes anywhere between 1000-46000 transactions can be processed at any one moment.
Lower barrier of entry
Proof of work quickly became an arms race in terms of hardware with the only practical way to now mine using Application-Specific Integrated Circuit machines, better known as ASIC mining rigs. These are costly and price out all but the biggest of mining operations. Proof of stake, however, requires nothing but a wallet with cryptocurrency meaning anyone with even a basic laptop or phone can participate.
Disadvantages of PoS
Risk of centralization
One of the biggest disadvantages of PoS is that the algorithm benefits those with more coins staked. This promotes a centralization of staking to a few pools in order to increase the likelihood of receiving a reward. Blockchains are now experimenting with their algorithms to consider factors such as how long coins have been staked with validators to ensure stake size is not the only thing that matters.
Blockchains have also taken the initiative and began reducing rewards for validators once they surpass a certain staking size to encourage decentralization.
While proof of work is undoubtedly more energy-intensive than proof of stake, it is also considerably more secure. The high hardware requirements for deciphering the mathematical puzzles in PoW mean participants have to front considerable outlay before joining the network. While this tends to lead to a handful of mining pools dominating the mining space, it also puts off bad actors.
Ultimately, PoS is still secure but relies on proof of wealth rather than a global network of computing power to verify transactions. While a 51% attack on either seems unlikely, an attack on a PoS is at least conceivable, especially for newer, smaller networks. In this scenario, a wealthy but nefarious participant could simply “buy” the network.
While the purported benefits of PoS, such as high TPS, make the consensus model appear more suitable for handling large amounts of transactions and easing congestion, the model is yet to be tested on a large-enough scale to suggest it is superior to PoW. Regardless, PoW’s low TPS means it fails to scale large enough to handle a global ecosystem, requiring layer 2 solutions to handle increased transactions.
Alternatives to proof of stake and proof of work
While all the focus is on proof of work and proof of stake, there are alternative consensus models that can be implemented into blockchains:
Proof of authority
Blocks are only validated by approved validators. This method is not decentralized and is unpopular in the crypto community for that reason.
Proof of history
This consensus model essentially implements a clock system into a blockchain to prove transactions have happened in the correct sequence. Platforms such as Solana use this to choose validators ahead of time, with one elected “leader” based on the amount staked. This speeds up TPS considerably. Solana (https://solana.com/), for example, has a practical TPS of 1500-3000.
Proof of stake and proof of work both allow blockchains to achieve consensus, but in dramatically different ways. Proof of work’s model makes it exorbitantly expensive to corrupt a blockchain but tends to move towards centralization of mining power while also creating requiring more energy. With proof of stake generating requiring orders of magnitude less energy to validate transactions, it is perhaps for this reason that it is considered the “better” consensus model. This “environmental” argument’s force is becoming somewhat weakened, however, with mining organizations now increasingly tapping into renewable energy sources to run their operations.
Regardless, both models have a place in the crypto space and will likely be around for a long-time yet to come.