Cryptocurrencies have taken the world by storm recently, with Bitcoin being the most well-known example. But as the popularity of cryptocurrencies has grown, so has the debate over the best way to validate transactions and maintain the integrity of the blockchain.
Two main approaches have emerged: Proof of work (PoW) and Proof of stake (PoS). Both have pros and cons and understanding the differences is crucial for anyone looking to invest in or develop blockchain technology. In this article, we’ll take a deep dive into PoW and PoS, examining the fundamental principles behind each approach and exploring the advantages and disadvantages of each method.
What is Proof of Work?
In blockchains powered by proof of work, robust virtual machines called miners race one another to determine the result of complicated math equations. The miner who computes the result of the problem first gets to push a new block to the blockchain and obtains returns from the network. Miners are rewarded with a certain quantity of cryptocurrency, usually determined beforehand.
Proof of work was released before proof of stake and used to be a no-brainer for early cryptocurrencies such as Bitcoin. It powers projects such as Cardano, Polkadot, and Tezos. Since its launch, it has become a popular option for altcoins.
Benefits of the Proof of Work Consensus Mechanism
Proof of work has several benefits, specifically for a somewhat uncomplicated albeit extremely useful coin like Bitcoin. It makes up for where it falls short in efficiency by being secure and dependable.
It is a robust means of making a decentralized blockchain network secure. The cryptocurrency’s price means newer miners are motivated to be involved in the network, making it more secure and powerful. This makes the cryptocurrency’s blockchain almost impossible to manipulate due to the processing power needed to compute complicated math problems.
Miners attempting to push invalid blocks to the blockchain are penalized with the great cost of processing power, energy, and time. Dogecoin, Litecoin, and Monero are coins that utilize proof of work. Although powerful, dependable, and secure, the poor efficiency of the proof of work model is still a problem, and this gave rise to the proof of stake consensus mechanism.
Limitations of the Proof of Work Consensus Mechanism
Proof of work is often frowned upon because of its energy consumption. Since many miners worldwide fight to solve the same problem, considerable energy consumption results. For example, records show that the energy consumed by Bitcoin annually is about the same energy consumed by a nation as large as Sweden. This creates a major concern in the energy industry and sounds negative to advocates of a greener earth.
Furthermore, the whole transaction procedure is not even close to being the fastest. Bitcoin’s transaction rate is only about 7 transactions every second. Blockchains that utilize other modes of consensus can work on thousands of transactions each second.
What is Proof of Stake?
In contrast to proof of work, proof of stake doesn’t use miners and doesn’t require the solution to complicated mathematical equations to be found. Verification is done in a far more environment-friendly approach. This mechanism permits coin holders to stake their coins and develop their nodes. These owners are called validators. The nodes are called validator nodes.
Staking in proof of stake performs roles analogous to mining in proof of work. This process allows new blocks to be pushed to the blockchain. Although the specific procedure might differ by project, it usually involves participants called validators on a cryptocurrency network who deposit, that is, stake their coins to the network to get an opportunity to validate new transaction blocks, push to the blockchain, and obtain returns.
The network determines a winner by considering participants’ commitment to the project. The amount of the coin deposited by each participant in the staking pool and the time they’ve left it there is used to determine the winner. After the winner validates the last received transaction block, the block’s validity can then be confirmed by other validators. When a specific sum of validators has confirmed the block’s validity, an update to the blockchain is made by the network.
Each time the blockchain is updated with a new block, brand-new cryptocurrencies are minted and shared among the block’s validators as rewards for staking. Although a few blockchains offer returns in another cryptocurrency, returns from staking are generally in the same currency as the network’s native cryptocurrency.
When users stake their cryptocurrencies, they still belong to them. Their cryptocurrencies which would have been otherwise dormant, are just being put to good use. Users can trade their coins if they wish through “unstaking.” However, this process may take some time and vary based on the cryptocurrency. Users are generally mandated to put their coins up for staking for a minimum duration.
The staked assets of the validators motivate validators to act honestly. If a validator accepts an invalid block, a fraction of their staked assets will be slashed. The amount slashed varies from one cryptocurrency network to another. Cardano, Algorand, Ripple, and Nano are examples of coins that utilize proof of stake.
How to Stake a Cryptocurrency
- Purchase a proof-of-stake-powered cryptocurrency like Cardano or Algorand.
- Transfer your cryptocurrency to a crypto wallet.
- Join a staking pool.
Although different cryptocurrencies support different staking methods, most stakers utilize staking pools. Staking pools allow cryptocurrency holders to merge their cryptocurrencies to give themselves a finer chance of receiving rewards for staking.
Benefits of the Proof of Stake Consensus Mechanism
Since proof of stake eliminates the call for complex mathematical computations, it is much more energy-efficient than proof of work, making it eco-system friendly. The environmental friendliness of proof of stake means there’s a fair chance it will keep gaining traction.
Another area where proof of stake outperforms proof of work is speed. Cryptocurrencies utilizing proof of stake can rapidly process transactions while decreasing costs. This makes them scalable. Notably, in September 2022, the Ethereum network transitioned from proof of work to proof of stake. The goal of the consensus transition was to aid users in enjoying faster transactions. According to Vitalik Buterin, Ethereum’s long-term plan is to be able to process 100,000 transactions per second. This sharply contrasts Ethereum’s previous transaction speed of 30 TPS when the blockchain network utilized the Proof of work model.
Further, Proof of stake systems makes investor participation more seamless. This is because little or no technical knowledge is required, eliminating the need for powerful computer systems.
Limitations of the Proof of Stake Consensus Mechanism
Prices of cryptocurrencies are volatile and can sink rapidly. The cryptocurrency staked by validators can suffer a huge price drop. Since the assets of validators are locked during the minimum staking period, the validators cannot do anything but sit and watch while the prices of their assets plummet. This could far outweigh the returns gotten from staking the cryptocurrency.
Also, decentralization levels in proof-of-stake ecosystems are relatively lower than in proof-of-work models. Although, in 2022, Vitalik Buterin controversially argued against this fact. The tech genius claimed the Ethereum network would become more decentralized after switching from PoW to PoS. Despite his arguments, it is yet to be proven that PoS systems are more decentralized than PoW systems.
Is One Better Than The Other?
Proof of work is a superior consensus mechanism with security and decentralization in mind. But in proof of stake, validators with the largest stake are continually given the power of validation. The consequence of this could be some style of centralization. This can’t happen in proof of work because it depends on figuring out complex mathematical equations. This is why proof of work is best for financial transactions.
Conversely, proof of stake is clearly the winner in terms of speed. This makes it a more suitable consensus model for blockchain operations like payment processing and gaming. Hence, the better consensus model to utilize would depend on the priorities of the blockchain network.