As we know, a cryptocurrency runs on a blockchain platform that keeps a record of all the transactions. To achieve consensus among all the nodes, a blockchain uses consensus algorithms, out of which the proof of work and proof of stake consensus mechanisms are the most popular. These mechanisms are run by nodes that take up the transactions and validate them to add a new block in the ledger.
Now, both Pow and Pos may sound like incomprehensible jargon to you. In this post, we get into the actual meaning of proof of stake and proof of work, and how these respective consensus mechanisms work.
What is Proof-of-Work?
You must have heard of the term Bitcoin mining in everyday life. The process of mining a BTC is based upon the proof of work consensus mechanism. As the name suggests here, proof of work is the mechanism in which the nodes are required to put in the ‘work’ of very powerful computers to solve complex mathematical puzzles. Hundreds of thousands of participants of the ledger compete against each other to solve the puzzle related to a transaction to validate it.
As this process consumes energy equivalent to what actual mining of the earth would take, the process is called digital currency mining. Until the computer gets the right combination of the numbers, computing power is continuously exhausted. This is why proof of work is considered to be highly disruptive of nature.
What is Proof-of-Stake?
Unlike proof of work, the proof of stake mechanism tries to reduce the energy dependence when it comes to adding blocks to the blockchain. You might have heard that blockchains using the proof of work mechanism get quite a lot of criticism due to the energy consumption issues. That is what the proof of stake mechanism aims to tackle.
Here, the validators do not have to compete with each other using computational power to validate a transaction. Instead, as a node, you will need to hold a significant amount of crypto tokens to get the chance to validate a transaction. These tokens are locked up on the blockchain as a ‘stake’; the more coins you stake for the longer duration, the better your chances are of being selected as a validator.
After successfully validating a transaction on a proof of stake chain, you may get rewarded with native tokens, a part of the transaction fees the blockchain accumulates, and more.
Pros and Cons of Proof-of-Work and Proof-of-Stake
Pros of Proof-of-Work
1. Healthy Competition and Renewable Energy
Since energy consumption is a problem with the mining process, the mining companies are now trying to find an alternative to conventional energy sources. Proof of work can be programmed to reward the nodes that use renewable sources of energy, or newer technologies that create faster and more efficient chips for mining.
2. Trapped Energy
A major difference between proof of work and proof of stake is that the POW mechanism cannot work without high energy consumption. But the developers have found a solution to this as well. One of the benefits of proof of work’s energy consumption is that it can be used to consume trapped energy. For example, some cities have many waterfalls and thus generate energy during the rainy season. But due to a lack of proper ways, the energy cannot be transferred outside. So it can be used for mining purposes rather than going to waste.
Since its launch, Bitcoin has had 99.98 percent uptime, more than any digital asset in the world. This is majorly because of the proof of work mechanism. In order to disrupt the blockchain running on POW, hackers will have to infiltrate about 51 percent of the nodes. This is much harder than hacking a blockchain running on other consensus mechanisms.
Cons of Proof-of-Work
1. Energy Consumption
As discussed just now, energy consumption is the biggest drawback that acts in favor of proof of work in the PoW vs. PoS distinction. According to an estimate, Bitcoin mining alone consumes about 144 TWh of energy per year. This is much more than a whole city like Paris would consume in a year.
Since the proof of work mechanism is constantly developing, the manufacturers are developing new ASIC mining chips. As soon as the new ones roll out, old ones are considered waste and thus replaced. It produces tons of e-waste. Moreover, equipment often gets short-circuited due to moisture or overload; this waste is dumped as e-waste.
Another con of the proof of work mechanism is the traceability due to the power surge. Since the power consumption is very high, miners can be easily located and compromised. Governments can easily ask for licenses to perform mining activities. This would be against the decentralization at the core of blockchain and cryptocurrency.
Pros of Proof-of-Stake
Amongst proof of work and proof of stake mechanisms, proof of stake is considered much more energy efficient. Since there is no competition of computational power amongst the nodes to validate the transaction first, there is no waste of energy. Moreover, even the ledgers running on proof of stake use renewable energy sources.
2. Increased Throughput
Since there is no concept of competing to validate the transaction, the validation process is much quicker. You need to have a significant amount of held tokens to validate a block. The process is quite clear and thus takes less time to complete.
3. Censorship Resistance
The proof of stake mechanism is pretty simple to use. It can be done using a less energy-consuming laptop as well. So the local authorities will not be able to trace you and thus censor your work.
4. Low Barrier to Entry
Another benefit in favor of proof of stake in the POW vs. POS competition is the low entry barrier. Unlike the proof of work mechanism, you do not have to buy heavy mining equipment and keep updating them to be a validator. There is just a one-time investment that is to purchase the crypto tokens to stake and win blocks.
Cons of Proof-of-Stake
1. Unproven at Large Scale
The PoS mechanism is simply far newer than PoW, and it has not proven its credibility as well yet. So the scalability and operability of this mechanism might still need to be improved at a larger scale. The PoS mechanism still needs to be proven as decentralized and capable as the proof of work consensus mechanism.
2. Coin Consolidation
Coin consolidation amongst a few validators is a con that acts against proof of stake. If you hold fewer coins than other validators, you will not be able to win as many blocks to validate. This can cause vulnerability in the integrity of the whole ledger and thus needs to be worked upon.
3. Less Robust Security
If hackers want to infiltrate the proof of stake mechanism, they have to spend money initially and hold 51 percent of the tokens. This will win them the majority of blocks and compromise the whole blockchain. It will be a major threat to the security and money people invest.
- Cryptocurrencies: Bitcoin is the biggest example of a currency that runs on PoW. Miners have to solve complex puzzles to add transaction information to the block, and in return, they are rewarded with the native token.
- DDoS attacks: These attacks are also caused by multiple participants or huge traffic being added to a server. This is done through a proof of work-like mechanism.
- Tezos: It is a cryptocurrency that rewards the participants for keeping the network secure. The validators are incentivized via newly created tokens.
- Ethereum 2.0: You must have heard about the recent update on Ethereum. ETH 2.0 uses a developed form of proof of stake.
- Cosmos: This cryptocurrency aims to facilitate the widespread use of the proof of stake mechanism, like Bitcoin does for PoW.
How are Transactions Verified: PoW
The process of verifying the transactions in proof of stake and proof of work mechanisms is very different. The proof of work mechanism works on a competitive structure. Taking the example of the Bitcoin blockchain, every ten minutes, a new block is added to the ledger. Verification of each transaction takes about ten minutes too. Now the miners compete against each other to get the solution to the complex puzzle attached with each transaction. The first miner to solve the puzzle and verify the transaction adds the transaction to the block and is thus rewarded. As soon as all the transactions are verified, the block is added to the blockchain.
How are Transactions Verified: PoS
The process involved in PoS is very different from the PoW mechanism. Here a node who wishes to participate in validation has to first purchase the crypto tokens and add them to a particular wallet. These assets are then frozen for a fixed time. The person with the highest stake wins the validator spot for each round, and once they successfully verify and add a new block to the chain, they are rewarded with native tokens, transaction charges, and more.
Is Proof-of-Stake better than Proof-of-Work? Reasons Why
The major difference between proof of work and proof of stake is the higher energy dependence of proof of work. Since the world is moving towards using renewable energy sources and being less dependent on conventional sources, the proof of work mechanism is admittedly not helping much. Crypto mining is one of the most energy exhausting tasks on the planet and that is why proof of stake is considered to be doing a better job than proof of work. In proof of stake, the validation part is done without any competition. Thus, proof of stake is the mechanism being chosen over proof of work by many.
Now that you have learnt all there is to know about proof of stake and proof of work, you must be aware of the differences and uses of the two. Apart from these two mechanisms, there is proof of space, proof of utility, and other kinds of consensus mechanisms as well, but these two are the primary mechanisms being used by most blockchains today. The blockchain proof of work vs proof of stake debate is not going away any time soon, but at the end of the day, both have their respective sets of pros and cons, and it’s up to the developers to decide which one fits their blockchain’s use cases best.
Frequently Asked Questions for PoW vs PoS
1. What is Proof-of-Work?
Proof of work is a consensus mechanism in which validators compete against one another to get the answer to a complex puzzle attached to a transaction. The validator who gets to the solution fastest gets to add the transaction to the block and is thus rewarded for the efforts.
2. What is a Bitcoin Miner?
A Bitcoin miner is the node that has to compete against multiple other nodes to solve the given mathematical puzzle first and add a new block to the chain.
3. What is Proof-of-Stake?
Proof of stake consensus mechanism makes use of staking to choose a validator. Here the validators have to purchase crypto tokens to be assigned blocks to verify and add transactions to. The crypto assets staked are frozen in a wallet until the validator is done with verification of the transactions.
4. What is a Validator in Proof-of-Stake?
Validators are nodes in a blockchain network that verify and add transactions to the blockchain. In case of proof of stake, they are equivalent to the miners in the roof of work consensus mechanism. These validators add new blocks to the blockchain and therefore help in the progress of the blockchain network.
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