Proof of Stake vs Proof of Work: Understanding the Differences
Cryptocurrency is a digital currency that allows users to make secure transactions over the internet. Around 46 million Americans have a share in the bitcoin network and experts predict that approximately 1 billion people worldwide will be using cryptocurrency transactions by the end of 2022.
Right now, everyone is interested to know how many coins are available in the market and how this phenomenon works.
With over 10,000 cryptocurrencies available currently, many people might find it difficult to comprehend how crypto assets work. Understanding the cryptocurrency network can be a piece of cake if you know about the methods that facilitate cryptocurrency transactions.
With a rising trend of digital assets, it is now crucial that all potential investors in the blockchain network must know about the algorithms implemented in this technology. Let’s delve into it and see what it’s all about.
Understanding Consensus Mechanisms
Consensus mechanisms are approaches used with computing resources to form necessary agreements across the blockchain network. As blockchain is based on a decentralized network without any single authority, it operates on the basis of consensus algorithms involving contributions from thousands of people working to verify additional blocks.
Proof of Work vs Proof of Stake: Understanding the Working
Proof of stake PoS and proof of work PoW are two consensus mechanisms used in the cryptocurrency networks for validating transactions. Since the invention of Bitcoin in 2009, it required a decentralized network with no third-party involvements. Consequently, the proof of work consensus mechanism was adopted for Bitcoin making it one of the most secure digital currencies in the world.
In simple words, PoS and PoW are two different approaches that validate transactions on the block chain network. Proof of stake system requires miners to commit an investment in digital assets before validating transactions.
Proof of Work Mechanism
Proof of work system requires miners to solve cryptographic puzzles using high-end computing power. The first miner to solve the puzzles can add new blocks to a blockchain for validating transactions. Proof of work requires high energy consumption and computational resources for a new block to be added to the blockchain network.
Read more about What is Proof of Work and how does it work.
Proof of Stake Mechanism
On the other hand, proof of stake is a relatively new approach proposed as an alternative to deal with the shortcomings of the proof of work mechanism. It was suggested in 2011 and requires fewer computing resources making it energy efficient to run the entire network. It is also easier to validate transactions as users only need to show a proof of their stake in the respective cryptocurrency.
Instead of relying on tangibility, this consensus mechanism uses less energy resources and is based on the existence of a verifiable stake. The proof of stake model is used by more than 80 popular cryptocurrencies due to low energy usage and fewer operating costs.
Unlike the proof of work model, miners do not need to compete for adding new blocks to verify transactions. Therefore, the proof of stake mechanism is more popular than the proof of work due to its multiple benefits for the miners.
Proof of Stake: Knowing the Pros and Cons
Proof of stake approach is more scalable as compared to the proof of work approach enabling the system to achieve more transactions per second. This approach requires less energy with lower equipment requirements making it easier to implement for most miners.
Moreover, it counters the latency issues with the efficient processing of thousands of requests each second. With low energy consumption and easy-to-understand working, this mechanism is a popular approach in the crypto world.
However, the proof of stake mechanism has several drawbacks which might not be noticeable for the crypto community. It does record the performance of miners and could lead to duplication of your stake on a forked blockchain when it splits.
Miners might go through the ‘nothing at stake’ dilemma when a transaction validator signs both sides of a forked blockchain. This might potentially double spend your coins and enable you to collect double transaction fees.
Proof of Work: Knowing the Pros and Cons
Proof of work mechanism requires miners to solve mathematical problems to add a new block on an existing blockchain. It keeps a record of the performance and encourages miners to follow the specified monetary policies. This approach keeps the network secure as a malicious participant needs to take over 51% of the computing power to defraud a chain.
Moreover, miners must plan strategically to optimize their returns. Proof of work also aligns with the economic concept of game theory where oligopolies avoid corruption within the blockchain and initiate useful decision-making. The miners with the most stake take the transaction fees for e.g. network fees.
Unlike the proof of stake mechanism, a miner is not required to divide their computational resources between the two sides of a forked chain. It offers an economic incentive allowing the miners to choose a side of a blockchain with the benefit of constant prevention of forking.
Although the proof of work system is more secure than the proof of stake, it is discouraged by financial advisors due to the amount of investment needed to set up the resources. This consensus algorithm can be inefficient according to the energy consumption and the latest equipment required which needs regular and costly maintenance.
Moreover, miners witness a significant upsurge in the transaction fees when the network becomes overloaded. Proof of work produces great amounts of heat and requires excessive amounts of electricity.
The operating costs for this mechanism are massive and lower the economic incentive for the miners. The issue of double spending is associated with the proof of work approach allowing miners to spend their coins twice in the cryptocurrency network.
Key Differences between Proof of Work vs Proof of Stake
Proof of work requires great amounts of energy to process the computing work. This approach requires massive amounts of electricity to facilitate the solving of mathematical puzzles so that miners can add blocks to an existing network.
Although, the proof of work approach is more reliable it lowers the investment incentive for the miner due to high initial investment. Miners have to bear high transaction and network fees to validate additional blocks for e.g. Bitcoin consumes a greater amount of electricity than Belgium and Finland annually.
However, proof of stake mechanism requires less energy as it chooses validators randomly as compared to the miners competing for solving complicated puzzles. The Ethereum Foundation announced the transition of this cryptocurrency to the proof of stake mechanism that will lead to 99.95% lower energy consumption.
Unlike the proof of stake mechanism that requires only a basic server-grade device, the proof of work mechanism requires the latest computing equipment with Application-specific integrated circuits (ASICs) to facilitate the problem-solving processes.
As the proof of work approach is designed for large-scale operations, it requires a lot of processing power and has high running costs. Whereas, the proof of stake model is based on an individualistic approach where the validators are not paid the reward for adding a new block as they are compensated with the network fees.
Methods to Verify Transactions
The PoW approach is based on the computing equipment available and the probability of solving mathematical puzzles. Transactions are time-consuming as the network becomes overloaded.
Whereas, the PoS mechanism is based on the stake of a miner in a particular cryptocurrency. Transactions are much quicker and have lower costs and a winner is determined on the basis of their stake in a specific coin.
Risk of Attack
In the PoW system, miners can only validate transactions if they complete the mathematical problems and they need to have at least 51% control over the network to implement fraudulent practices. However, if the miners follow dishonest practices in the PoS system, they lose their stake.
Moreover, the PoS mechanism is designed in such a way that it does not produce any economic incentive to the miner as they cannot double-spend or introduce malicious blocks without the risk of losing their investment.
Unlike the proof of work model, the proof of stake system does not discourage forking automatically. The PoW system leads to the dilemma of double spending allowing miners to use their coins twice. However, the PoS mechanism allows miners to choose a side of a forked blockchain providing them with better investment returns.
Proof of Work vs Proof of Stake: Which Mechanism is Better?
The PoW mechanism is ideal for large-scale operations and rewards miners on the basis of their ability to solve complicated problems. Whereas, the PoS approach addresses the concerns related to energy efficiency and environmental impact.
The primary issue with the PoS system is the large amount of investment required upfront for buying stake in a network. There is no track of performance although having a stake in a blockchain adds a layer of security preventing a miner from fraudulent activities.
To determine which mechanism is better, a miner needs to focus on the coins they are working on and the approach followed by an existing blockchain. Many cryptocurrencies are transitioning towards the PoS approach due to the energy crisis caused by the PoW mechanism.
When PoS and PoW Approaches Should be Used?
The consensus mechanism required by a blockchain depends on the needs and functionality of a network. There are various factors that must be noticed such as the performance, security, working and process of validating additional blocks to an existing network.
If there are several copies of additional blocks, the PoW approach identifies the most authentic copy. Proof of work is also designed as a reward based system increasing the monetary incentive for a miner. Whereas, the proof of stake approach ensures a better security by associating the risk of stake for the miner and the network to discourage malicious practices.
Both the consensus mechanisms have their own advantages and shortcomings, making them a suitable choice for different cryptocurrencies. With the advance in technology, miners and networks have been raising concerns against both these approaches and aim to look for a better mechanism which will be beneficial for the blockchain world.
One such mechanism is the proof of space approach or the Chia Project to facilitate secure transactions. This project implements the concepts of proof of time and proof of space to address the centralization issues in the PoS and PoW approaches. You need to understand that this article is not a financial advice and is recommended for educational purposes only.
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.