Proof of Work vs Proof of Stake

Proof of Work vs Proof of Stake: which network is better? Consensus models are a touchy topic in the blockchain industry, loyal Bitcoin and Ethereum maximalists will curse you to death for claiming that one is better than the other. See the truth for yourself by reading a quick and simple comparison!

The core principle of blockchain technology is to solve how network participants reach an agreement on a single state of a digital ledger in a decentralized way. There are numerous consensus mechanisms that decide how nodes reach consensus, with the most popular ones being proof of work (PoW) and proof of stake (PoS).

To uphold their legitimacy, decentralization, and stability, blockchain networks must at all times have only one state. Think of it like this: if there were alternate realities, nodes would have the job to reach a consensus on which reality is the ‘real’ one. Similarly, blockchains must retain one recorded history of transactions and their status.

Consensus models also have an effect on how miners confirm transactions and reach the aforementioned consensus. This leads to the famous question of proof of work vs proof of stake, where adamant Bitcoin & Ethereum supporters fight over the superiority of each model.

A quick summary on PoW and PoS

Theoretically, the winner is clear. But in practice, it is still to be seen which model fares better. Before comparing PoS and PoW, let’s first take a look at what each model is and how it works.

What is Proof of Work and how does it work?

Proof of Work is the first consensus mechanism to be used in blockchain technology. It was created by Satoshi Nakamoto, the mysterious creator of Bitcoin. PoW served as the foundation for all other blockchains and seeing Bitcoin’s success; developers did not think twice.

Nakamoto based his design on Hall Finney’s idea of a ‘reusable proof of work.’ Nodes powering the network have the objective of confirming blocks of transactions that are later permanently and immutably embedded into the digital ledger.

Processing transactions is done by mining; AKA solving complex mathematical problems using computing power in order to rank higher for a block reward. The more power one spends, the better his chances are.

The problem? Mining becomes extremely competitive with more nodes. Mining difficulty increases, and nodes have a lower chance of earning rewards. This results in having to spend more money on newer hardware and buying more components (usually GPUs). Obviously enough, power consumption only rises with time, and at one point, the entire network spends as much electricity as a metropolitan area.

As a consensus mechanism, Proof of Work is definitely more than decentralized. But truth be told, it is fairly unsustainable, and there must be a healthy alternative.

It is also worth noting that mining is not as inclusive as it used to be. A decade ago, users could mine dozens of Bitcoin with only their laptops. Today, profitable mining entails renting entire facilities to host so-called mining farms. Not everyone has the money to do so, and even if they do, the person has to live in an area with low electricity costs.

All of these small problems pile up and make PoW completely impractical. For a portion of the crypto community, Proof of Stake is the consensus mechanism that should replace PoW.

What is Proof of Stake and how does it work?

Proof of stake is a consensus mechanism introduced by Sunny King and Scott Nadal a few years after Bitcoin’s very own launch. The idea of PoS is to replace PoW for the purpose of making blockchains more energy-efficient.

Miners spend more than $5 billion annually on power costs, so it makes sense why efficiency is a top priority. After all, costs will only increase with time as mining difficulty grows and nodes have to spend more computer power to outcompete each other.

The way that PoS solves the issue is by replacing miners with validators. The job of a validator is the same as a miner (confirming transactions), but the course of action is different.

In this case, the node must provide a ‘stake’ which ensures that he will act in good faith. If he does not do so, either by sending faulty transactions or conducting other malicious activities, the network slashes his stake. Ethereum 2.0 strictly demands a minimum stake of 32 ETH, so you can imagine how painful it is to even lose a single Ether.

As you can see, the economic basis is extremely different in PoS networks. Instead of paying electricity to participate in the network, nodes must put their crypto assets on the line. There is practically no high hardware requirement for staking, which naturally leads to minimized electric consumption.

Developers believe that such a system leads to better security, scalability, and even decentralization. However, not everyone shares this opinion. There are still hypothetical problems that can affect security. Also, there has been no PoS-based network that has processed a significant user base so far, so no one can confidently claim that PoS scales better.

Proof of Work vs Proof of stake: Which one is better?

There are a number of elementary questions that must be answered when comparing proof of work vs proof of stake, which boils down to decentralization, security, scalability, and power consumption.

To help you get a better grip of the subject at hand, we will closely inspect each element individually and compare PoS against PoW to see which one works better. Ready? Let’s start.

Decentralization

The balance between decentralization and centralization is a crucial question for blockchain networks. Although both of the aforementioned consensus mechanisms are decentralized, there are a few factors that can push a blockchain towards centralization.

On Proof of Work, mining difficulty forces participants to acquire better equipment. The demand is so high that GPU producers like NVIDIA and AMD face shortages after launching every new lineup. But GPU mining is a practice done by those in the middle, who are neither casual nor professional miners.

Those at the top of the mining hierarchy purchase ASICs (Application Specific Integrated Circuit) machines to mine cryptocurrencies like Bitcoin. Since they are designed solely for the purpose of mining, they are far faster than ordinary computers.

Certain groups of people who professionally mine crypto assets buy massive amounts of ASIC machines in order to fuel their hash power. Sometimes, these groups even work together on creating a pool for the purpose of increasing their chances of earning block rewards.

Such mining farms are often hosted by only a few people. But although the number of these operators is small, they control a  large portion of the overall BTC mining power.

For example, it is worth noting that China leads the race in this regard since they can directly purchase ASIC machines from their nearest manufacturer, and electricity prices are incredibly low compared to the rest of the world.

If it is not already obvious, such a system is incredibly unjust and contributes nothing to decentralization. If only a few percent of miners account for, let’s say, 40% of the overall BTC hash power, how can we say that Bitcoin is decentralized?

Proof of stake does have similar problems since wealthier groups have a higher chance to earn block rewards. But then again, PoS is more accessible and inclusive. Everyone can stake ETH on Ethereum 2.0, and there is no need to invest in decaying GPU technology or to spend thousands of dollars on rent. With that in mind, we consider PoS to beat PoW in terms of decentralization.

Security

If a blockchain network is not secure and transactions can be changed or influenced at will, there is no point in utilizing the system. Security is a top priority for blockchains, and in order to stay safe, the network must safeguard against various popular attacks and exploits.

One such attack that stands out is the 51% attack. Essentially, the exploit is performed once a single entity gains more than 51% of control over the network. In PoW, that would mean that the entity controls more than half of the mining power.

On PoS, the attack does not make sense. The individual would have to buy enough coins or tokens to own 51% of the supply. Moreover, he would have to stake these assets and put them on the line. Since the actor can be punished for bad behavior, there is no point in conducting such a maneuver.

All in all, certain economic incentives and processes make exploits totally inefficient. In this specific case, there is nothing really to gain from the attack. If one buys 51% of the token supply, he ends up driving the price and profiting in the process. Changing a single block is not something that can outperform simple buying pressure in terms of value gained.

Scalability

Neither Proof of Work nor Proof of Stake are inherently scalable. Both consensus models have a problem with processing a high number of transactions in a short time span. So if that is the case, why does everyone claim that PoS scales?

What enables PoS to stake is ‘sharding,’ a process in which multiple chains are implemented in order to divide the overall workload. Think of it as a CPU that processes tasks faster if it can spread computing activities among multiple threads.

Sharding is a technology that can theoretically be implemented in both consensus models. In practice, however, no developer was capable of featuring sharding in a PoW network. On the other hand, we have plenty of PoS networks that already feature sharding.

Nevertheless, all of this only works in theory. Users and developers still have to see if Proof of Stake actually scales with sharding when demand is high.

Power Consumption

This one is short and simple. We previously talked about how Proof of Work nodes consume massive amounts of energy in order to mine coins. The only reason why this is the case is that a computer must be powerful enough to even have a chance to earn block rewards.

On PoS, users solve no complex math problems. The only requirement is to stake crypto assets and host a standard node that can handle this activity. The only real task is to stay online 24/7 and confirm a transaction when required. Other than that, there is really nothing that requires constant attention and high power consumption from the node.

So there you have it. PoS completely beats PoW in the field of power consumption. Staking is the absolute winner, and there is no technological innovation that can beat it any time soon.

Proof of Work vs Proof of Stake: Conclusion

Proof of work vs proof of stake? After all this time, it is unmistakable who the clear winner is in this showdown between consensus models.

Proof of Work is simply outdated and cannot perform in the same way that it used to a decade ago. There are more miners than ever, and heavy competition will only drive mining difficulty higher. This would have a severe impact on not only how ecological cryptocurrencies are but how inclusive they are as well.

Aside from power consumption, PoS dominates in other aspects such as decentralization, security, and scalability as well. Although the model has problems of its own, it does a far better job at upholding the core ethos of disruptive and decentralized technology.

But there is no point in boasting right now. We have to concede that no PoS network has served millions of users so far and proved once and for all that it is actually better than PoW. Until that moment, PoS will float in the air as an ‘ideal’ for what blockchains should look like.

After Ethereum 2.0 proves that sharding and PoS can vastly improve blockchain technology, will other developers strive towards converting to staking as well? Or will PoW struggle in the market until PoS takes over?