In the rapidly developing cryptocurrency world, “proof of stake” and “proof of work” are crucial concepts that usually cause a lot of contention within the cryptocurrency community. But what are they? And why is it important for you to understand these concepts? This article will provide a comprehensive breakdown of these two concepts and their relationship.
• Proof of Stake and Proof of Work are both ways in which a blockchain network can achieve consensus.
• Proof of Work involves the use of miners solving complex mathematical problems necessary for verifying transactions and adding blocks to the blockchain in turn being offered block rewards.
• Proof of Stake involves forgers who verify transactions and add blocks to the blockchain based on their stake, in turn, being rewarded with a transaction fee.
• Both PoW and PoS have severe shortcoming but PoS has tried to resolve some of the shortcomings of PoW including power and cost inefficiently in addition to scalability issues.
• The much-awaited Ethereum’s transition from PoW to PoS mechanism will play a vital role in determining the future of both PoS and PoW consensus mechanism.
First and foremost, before we delve into PoS and PoW, let’s first refresh ourselves on blockchain technology and how it works. The blockchain technology is a decentralized peer-to-peer system based on blocks (a growing list of records) linked using a cryptography). The backbone of the blocks is the distributed ledger which permanently records transaction between two parties with an option of verification. The crucial role played by the distributed ledger system within the blockchain technology is to ensure that the entire peer-to-peer network mutually adheres to an inter-node communication protocol along with validating new block via a consensus mechanism
What is Consensus Mechanism?
A consensus mechanism is basically a dynamic way of arriving at a decision within a large group without necessarily voting. In the blockchain technology, consensus mechanism is employed to ensure that information being added to the distributed ledger can be valid through verification.
Consensus mechanism ensures that the immediate transaction i.e. block is immediately added to the network thus preventing invalid data from being added to the blockchain. Consensus mechanism also prevents constant forking which disrupts the blockchain network leading to immense consequences among cryptocurrency investors.
With cryptocurrency, there are various ways in which cryptocurrencies achieve consensus depending based on the software architecture. The consensus mechanisms play a similar role of verifying and rewarding verification of transactions but use different methodology.
Proof of Work (PoW) and Proof of Stake (PoS) are the most common blockchain consensus mechanisms employed by most cryptocurrencies.
The debate over the functionality of PoW and PoS has divided the cryptocurrency community with PoW fans arguing that it was designed for cryptocurrency while PoS fans disagreeing over the inefficiency, insecurity and outdatedness of PoS. Nevertheless, here is a detailed look of both.
Proof of Work (PoW)
- What it Entails
Proof of Work (PoW) is based on the “Show us that you did the work, and we’ll let you create the new block” theory. It is basically a mechanism of preventing denial of service attacks along with other unauthorized entry by employing the use of a computer’s processing time and power. Proof of Work is the central idea behind the functioning of Bitcoin as it enables a trustless and distributed consensus vital for the functioning of Bitcoin.
- How it Works
Bitcoin’s PoW system involves miners who utilize a computer’s processing power to solve complex mathematical problems in form of encrypted puzzles, in turn, verifying that all transactions (blocks added to the candidate block) are authentic. The miners are rewarded for authenticating a transaction with a certain percentage of the transacted amount also referred to as a block reward. Once a transaction has been validated, it automatically creates a block which is then permanently stored in form of a public ledger on the blockchain.
Proof of Work has a number of severe limitations including
- It involves an enormous amount of work on the miners’ side in addition to advanced computer processing power.
- It is also very competitive since the first miner to solve the encrypted puzzle is awarded the block.
Due to these shortcomings, other consensus mechanisms have been developed with the most popular being “Proof of Stake”.
PoW coins include Bitcoin, Ethereum (set to transition to PoS), Litecoin and Monero.
Proof of Stake (PoS)
- What it Entails
Proof of Stake (PoS) plays the same role of validating transactions and achieving consensus as PoW within the blockchain technology, however, it uses quite a different methodology. PoS basically achieves consensus in a blockchain network by requesting its users to validate ownership by showing their stakes (coins/tokens one possesses).
- How it Works
Unlike PoW systems where mining involves solving complex mathematical puzzles, a miner known as a forger in PoS adds blocks to the existing blockchain based on their stake along with the oldness of their stake in that particular blockchain’s network.
Proof of Stake ensures transactions are verified and consensus achieved through the use of a cryptographic algorithm but with a different mechanism from that of PoW. Unlike PoW which offers Block rewards to its miners for solving complex puzzles, PoS does not reward instead forgers are awarded transactions fees based on the creation of the next block depending on their stakes.
Validating a transaction in PoS involves a forger transferring a specific amount of their coins into a specific wallet which then freezes the coins to be used as the network’s stake. Securing a PoS based blockchain network is based on the thought that forgers who have staked their coins would not want to engage in malicious activities to safeguard their hard-earned coins. An attempted hack or detection of a malicious activity have an enormous consequence on the side of the forgers including a total loose of their stake.
Despite Proof of Stake systems trying to eliminate the major shortcomings of PoW, it has some limitations which can easily be solved with further research. Some of these limitations include:
• PoS system has been criticized for ideally not being to meet the distributed consensus protocol due to the “nothing at stake” problem that comes about due to constant forking causing consensus failure. Users can abuse such a situation by taking part in fraudulent activities such as double-spending or double transaction rewards.
• There is also concern that PoS is discriminatory as it only allows investors with a large amount of stake to realize huge returns on their investment and not unestablished crypto investors. This has an effect of enriching the already rich.
• Unlike PoW, PoS allows users to verify transactions on multiple chains instead of a single chain. This security breach makes PoS susceptible to double-spend attacks from hackers. Additionally, authorized transactions are not added immediately to the blockchain making users to transact the already transacted funds causing significant losses.
• In PoS consensus, the validation of wrong transactions cannot be detected by other users putting it at a greater risk of fraud.
PoS coins include Cardano, OmiseGo, QTUM and Ardor
Relationship between Proof of Work and Proof of Stake
Proof of Work and Proof of Stake have both their share of advantages and downsides. While PoS is highly energy efficient along with improving scalability substantially increasing transactions speeds, it is vulnerable to security breaches. Additionally, despite PoS being effectual in securing a blockchain network, the enormous energy used along with extremely slow transactions speed in a major “a headache” to the cryptocurrency community.
Here is a relationship between the two in terms of centralization, energy and overall cost.
The issue of centralization of PoW systems has recently come under scrutiny of the cryptocurrency community with some analysts predicting that the decentralized nature of the blockchain technology is slowly fading in PoW systems attributed to large-scale mining pools taking over the control of the blockchain. This is where PoS comes in handy to offer a fair solution since the amount of network under one’s controls depends solely on their stake and investments.
The nature of PoW systems makes it increasingly unmanageable for individuals to put up with enormous mining farms who are more concerned with generating substantial profits rather than contributing to the health of the network.
2. Energy and Cost
As mentioned above, PoS is much more cost-effective and energy-friendly as compared to PoW. The enormous energy required in running PoW systems makes it unsuitable for achieving the world’s green energy goals, therefore, a large number of environmental organizations as well as some governments are rooting for PoS systems to at least conserve the environment. The high cost of electricity along with the massively inflated cost of computational resources makes PoW less cost-effective as compared to PoS systems. In an age where mining has been set aside for large-scale mining pools with financial muscle rather than cryptocurrency enthusiasts, the cost-effectiveness of PoS systems ensures that its accessible to cryptocurrency community to invest in.
While the security of the PoS systems is still a concern, it is important to note that it’s still a new concept and requires much improvement. Nevertheless, PoW systems have been established to have a major security shortcoming i.e. constant forking. Constant forking destabilizes the entire network since it splits the network leading to miners splitting their computational resources. Additionally, PoS systems still do not eliminate forking making it possible for users to engage in frauds such as claiming the transaction fee reward by using both sides of the fork or illegally increasing their stake, a problem referred to as “nothing at stake problem”. However, this shortcoming can be eliminated by implementing a deposit lock for a set period.
Proof of Stake vs Proof of Work: Which One Is the Future of Consensus Mechanism?
PoW being the pioneer consensus mechanism of Bitcoin is well established along with offering unmatched security to a blockchain network makes it desirable by many cryptocurrency enthusiasts for years to come. However, its major shortcoming including energy and cost inefficiency, scalability issues leading to very slow transactions in an increasingly impatient cryptocurrency world along with eroding the decentralized nature of the blockchain technology gives it a very bleak future within the cryptocurrency community.
On the other hand, despite the immense security concerns of the PoS consensus in an extremely security-concerned cryptocurrency world makes its future highly in doubt. However, with numerous researches aimed at addressing the security concerns giving hope to the cryptocurrency community in addition to its cost and energy effectiveness along with an advanced scalability ensuring pretty faster transaction guarantees PoS a luminous future in the rapidly advancing cryptocurrency world.
Nevertheless, much of PoS future depends on the set transition of Ethereum from PoW to PoS. Ethereum and will use a consensus protocol known as Casper designed to enhance security by eliminating the ‘nothing at stake’ problem. Being the first cryptocurrency to directly switch from PoW to PoS, the blockchain-crypto community is keenly observing this transition to determine the benefits of PoS over PoW. A successful transition will indeed assure PoS of light at the end of the tunnel and subsequently mark the end of PoW consensus.
The Bottom Line
Proof of Work and Proof of Stake are both ways in which a blockchain technology can achieve a consensus which plays a crucial role in ensuring that blocks i.e. transactions are permanently added to the blockchain.
While both PoW and PoS have a similar function of achieving consensus in a blockchain network, they function quite differently. PoW achieves consensus via the use of miners who solve complex mathematical problems referred to as proof-of-work problem to verify transactions, in turn, being rewarded in block rewards. PoS, on the other hand, does not use miners instead employs forgers who create blocks depending on their currency stake, in turn, being rewarded the transactions fees.
Both PoW and PoS have advantages and disadvantages as discussed above but PoS seems to outdo PoW despite the security issues. The transition of Ethereum from PoW to PoS is keenly awaited and will play a vital role in determining the future of both PoS and PoW in the cryptocurrency world.