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Proof of Work vs. Proof of Stake

Published on
June 22, 2022
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Proof of Work vs. Proof of Stake

Which network is better: Proof of Work or Proof of Stake? In the blockchain sector, consensus models are contentious; devoted Bitcoin and Ethereum maximalists would curse you if you imply that one is better than the other. Read a brief and easy comparison to see the truth for yourself!

The core premise of blockchain technology is to provide a decentralized solution for network participants to agree on a single state of a digital ledger. Proof of work (PoW) and proof of stake are two of the most prominent consensus procedures for determining how nodes reach consensus (PoS).

Blockchain networks must always have only one state to maintain their validity, decentralization, and stability. Consider this: if there were alternate universes, nodes would be responsible for determining which one is the real one. In the same way, blockchains must keep a single record of all transactions and their state.

The way miners confirm transactions and obtain the consensus above is also affected by consensus models. This leads to the famous debate between proof of work and proof of stake, in which ardent Bitcoin and Ethereum proponents argue about which model is best.

A brief overview of PoW and PoS

The winner is obvious in theory. However, it has to be shown which model performs better in practice. Let's look at each model and how it works before comparing PoS and PoW.

What exactly is Proof of Work, and how does it function?

The Proof of Work consensus mechanism was the first to be employed in blockchain technology. Satoshi Nakamoto, the enigmatic Bitcoin developer, created it. PoW served as the cornerstone for all other blockchains, and developers didn't hesitate to use it after Bitcoin's popularity.

Hall Finney's concept of a "reusable proof of work" inspired Nakamoto's design. The network's nodes are responsible for confirming blocks of transactions, which are then permanently and immutably recorded in the digital ledger.

Mining, or solving complicated mathematical problems with processing power to rank higher for a block reward, is how transactions are processed. The more power spent the greater one's prospects.

What is the issue?

With additional nodes, mining becomes increasingly competitive. The difficulty of mining rises while nodes' chances of reaping rewards decrease. As a result, more money must be spent on modern hardware, and more components must be purchased (usually GPUs). Power consumption increases over time, and at one point, the entire network consumes as much electricity as a metropolis.

Proof of Work is more than decentralized as a consensus mechanism. But, to be honest, it's not sustainable, and there has to be a healthier option.

It's also worth noting that mining is no longer as diverse as it once was. Users could mine dozens of Bitcoins with simply their PCs a decade ago. Renting whole facilities to host so-called mining farms is now necessary for profitable mining. Not everyone has the financial means to do so, and even if they do, they must live in a region where electricity is inexpensive.

All of these minor issues add together to render PoW utterly unfeasible. According to some in the crypto world, Proof of Stake is the consensus mechanism that should take the place of PoW.

What exactly is Proof of Stake, and how does it function?

Sunny King and Scott Nadal created a proof of stake as a consensus mechanism a few years after Bitcoin's initial introduction. PoS was designed to replace PoW to make blockchains more energy-efficient.

Miners spend more than $5 billion on electricity each year, so, understandably, efficiency is a primary focus. After all, when mining difficulty rises and nodes must expend more computing power to outcompete one another, expenses will only rise.

PoS addresses the problem by substituting validators for miners. A validator's job is similar to a miner's (confirming transactions), but the approach is different.

The node must submit a stake in this scenario, ensuring that he will behave in good faith. If he fails to do so, either by sending erroneous transactions or engaging in other harmful behavior, the network will reduce his stake. The minimum stake in Ethereum 2.0 is 32 ETH, so you can understand how agonizing it is to lose even a single Ether.

As you can see, the economics of PoS networks are very different. Nodes must put their crypto assets on the line instead of purchasing electricity to participate in the network. Staking does not necessitate a lot of hardware, which leads to electricity usage being kept to a minimum.

Developers hope that this system will improve security, scalability, and even decentralization. However, not everyone agrees with this viewpoint. There are still some possible issues that could jeopardize security. Furthermore, no PoS-based network has yet to process a large number of users. Thus no one can reliably assert that PoS scales well.

Which is better: Proof of Work or Proof of Stake?

When comparing proof of work vs. proof of stake, there are a few primary concerns: decentralization, security, scalability, and power consumption.

To assist you in better understanding the subject at hand, we'll look at each piece individually and compare PoS with PoW to find which one works best. Ready? Let's get this party started.

Decentralization

A significant concern for blockchain networks is how to strike a balance between decentralization and centralization. Although each of the consensuses above techniques is decentralized, a blockchain can be pushed towards centralization by a few circumstances.

On Proof of Work, the difficulty of mining forces players to upgrade their equipment. The demand is so great that GPU manufacturers such as NVIDIA and AMD have to deal with shortages after each new lineup. On the other hand, GPU mining is practiced by folks who are neither casual nor professional miners.

Those purchase ASICs (Application Specific Integrated Circuit) machines at the top of the mining hierarchy to mine cryptocurrencies like Bitcoin. They are much faster than regular computers since they are developed specifically for mining.

Certain groups of people who mine crypto assets for a living purchase many ASIC processors to increase their hash power. These groups will sometimes collaborate to form a pool to increase their chances of earning block rewards.

A small group of people usually hosts mining farms. However, even though the number of these operators is modest, they control a significant fraction of the total BTC mining power.

For example, China is ahead of the pack because they can buy ASIC machines directly from their local manufacturer, and electricity rates are incredibly inexpensive compared to the rest of the globe.

If it isn't evident already, such a system is unjust and does nothing to promote decentralization. How can we assert that Bitcoin is decentralized if only a few percent of miners account for 40% of total BTC hash power?

Proof of stake has some of the same issues, as wealthier groups have a better chance of earning block rewards. PoS, on the other hand, is more accessible and inclusive. On Ethereum 2.0, everyone can stake ETH, and there is no need to invest in aging GPU technology or pay thousands of dollars in rent. In light of this, we believe PoS outperforms PoW in terms of decentralization.

Security

There is no use in using a blockchain network if it is not secure, and transactions may be modified or influenced. Blockchains place high importance on security, and to be safe, the network must protect itself from a variety of common attacks and exploits.

The 51 percent attack is one such attack that stands out. Essentially, the exploit is carried out once a single entity controls more than 51% of the network. In the case of PoW, this means the entity has control over more than half of the mining power.

The attack makes no sense in a PoS environment. To possess 51 percent of the supply, a person must purchase enough coins or tokens. Furthermore, he would be required to stake and risk these assets. There is no use in such a strategy because the performer can be penalized for improper behavior.

Overall, specific economic incentives and processes render exploits useless. There is nothing to gain from the attack in this particular circumstance. If one purchases 51% of the token supply, he can manipulate the market and profit. Changing a single block does not outperform simple buying pressure regarding the value obtained.

Scalability

Inherently, neither Proof of Work nor Proof of Stake are scalable. Both consensus models struggle to process a large number of transactions in a short period. So, if that's the case, why do so many people believe PoS scales?

Sharding, a procedure in which many chains are established to distribute the total burden, is what allows PoS to stake. Consider it like a CPU that can process jobs quicker by distributing computing duties among numerous threads.

Sharding is a technology that can be used in both consensus models in theory. However, no developer could implement sharding in a PoW network in practice. On the other side, sharding is already present in several PoS networks.

All of this, however, only works in theory. When demand is excellent, users and developers must still see if Proof of Stake scales with sharding.

Consumption of energy

This is a quick and easy one. We previously discussed how Proof of Work nodes use significant energy to mine coins. The only reason for this is that a computer must be powerful enough to earn block rewards in the first place.

Users on PoS do not have to tackle any complicated math problems. The sole requirements are to stabilize crypto assets and host a standard node capable of handling this activity. The only real responsibility is to be online 24 hours a day, seven days a week, and confirm transactions. Apart from that, there isn't anything that necessitates the node's constant attention and high power consumption.

That's all there is to it. PoS outperforms PoW in terms of power consumption. Staking is the clear winner, and no technological advancement will ever be able to match it.

Conclusion: Proof of Work vs. Proof of Stake

What is the difference between proof of work and proof of stake? After all this time, the apparent winner in this debate between consensus models is unmistakable.

Proof of Work is just out of date and no longer performs as well as a decade ago. There are more miners than ever before, and the intense rivalry will increase mining difficulty. This would significantly impact how environmentally friendly cryptocurrencies are and how inclusive they are.

Besides power consumption, PoS also outperforms decentralization, security, and scalability. Despite its flaws, the model performs a much better job of retaining the core ethos of disruptive and decentralized technology.

However, boasting is pointless at this time. We must admit that no PoS network has yet served millions of users and proven beyond a shadow of a doubt that it is superior to PoW. PoS will float in the air as an 'ideal' for how blockchains should look until that day comes.

Will other developers attempt to convert to staking if Ethereum 2.0 reveals that sharding and PoS can vastly improve blockchain technology? Or will PoW be a market laggard until PoS takes over?