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Proof-of-Work Vs Proof-of-Stake: A Comprehensive Comparison

| November 17, 2023

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Blockchain technology has come a long way since the invention of Bitcoin. While several developments have emerged in the blockchain industry since Bitcoin’s arrival, their core functionalities rely on the fundamentals laid down by the first-ever blockchain network. Data integrity, transaction security, and permissionless access are enabling numerous disruptive applications in every major industry.

The utility brought about by blockchain exists thanks to the underlying consensus mechanism brought to fruition by the creator of Bitcoin. Essentially, consensus mechanisms are the operating force behind blockchains that prevent hacks and attacks, which can render them useless and their native crypto’s value to plummet. Consensus mechanisms, therefore, secure blockchain protocols and additionally introduce new cryptocurrencies into circulation.

While the Bitcoin network functions on the Proof-of-Work consensus, there are other mechanisms — mainly Proof-of-Stake — being developed and implemented. As these updates try to accommodate the growing blockchain user base and offer other incidental benefits like sustainability, PoW still remains the most reliable in certain aspects. The secureness of the Bitcoin network and the fact that it has never been attacked is because it operates on PoW.

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What is Proof-of-Work?

While PoW was introduced in the early 90s for use cases beyond what it offers today, Satoshi Nakamoto, the pseudonymous creator of Bitcoin, made it possible for PoW to secure a fully decentralized payments network. There were many attempts to create such a network prior to Bitcoin, but all were futile because of the centralization they needed at some point in their operation.

What Satoshi got right with PoW’s implementation in Bitcoin was its decentralized consensus and its ability to secure the network from users spending the same cryptocurrency twice or more. To understand how PoW secures blockchain networks, let’s look at how the consensus mechanism works.

How Proof-of-Work Works

Network participants known as miners on PoW networks are tasked with building the blocks containing transactions and adding them to the blockchain. The process of building the blocks starts with miners across the network competing for the opportunity to do so. PoW networks like Bitcoin require miners to solve complex cryptographic puzzles which utilize a lot of energy and processing power. The miner who solves the puzzle first gets the chance to build the subsequent block for the network by filling it with transactions and adding it to the blockchain. The transactions on the proposed block are verified by the other miners on the network. Once a majority consensus of 51% or more is reached, the block is considered valid, and the chain continues to grow. As a reward for building the block, the miner is paid the transaction fees from the validated transactions, and the cryptocurrency is minted into circulation as a result of mining.

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The Pros Of PoW

The incentivization of network participants for their efforts in building valid blocks breeds good behaviour, providing the basis for network security. If an attacker is looking to double-spend cryptocurrency, they need to fill a new block with the fraudulent transaction and add it to the blockchain. Due to consensus, however, the rest of the network will deem the block invalid and stop adding blocks past the invalid one.

In theory, such attacks would be successful if the attacker gained enough resources to form a majority consensus by themselves. This would require them to possess at least 51% of the network’s processing power to successfully validate a block with one or more fraudulent transactions.

In reality, such a feat is close to impossible, especially with large networks like Bitcoin. The need for mining processors and the massive amounts of electricity required to take over the network would cost the attacker billions. Not only is such an attack infeasible, but it would also lead to the network’s currency plummeting in value, defeating the entire purpose of the attack.

The Cons Of PoW

While PoW networks are known for their superior security and decentralization, they do have shortcomings, keeping networks like Bitcoin from becoming mainstream payments system. The amount of energy these networks consume is tremendous, and although that helps protect networks from attacks and centralization, it brings about massive environmental concerns. Further, PoW networks are also known to lack the capabilities to scale. The amount of work needed to create blocks chokes the network’s throughput, offering it the ability to process no more than a few transactions every second.

The latter is persistent with all PoW chains and is the reason why many developers are building blockchain networks with newer and more experimental consensus mechanisms like the Proof-of-Stake.

What Is Proof-of-Stake?

In the pursuit of bringing scalability to decentralized ecosystems, many newer blockchain protocols are implementing a newer consensus mechanism known as the PoS consensus. Most recently, the Ethereum network switched its consensus mechanism from PoW to PoS. The porting of consensus mechanisms was done to offer an environmentally sustainable network that can scale to process thousands of transactions per second.

How Proof-of-Stake Works

The PoS consensus mechanism offers faster transaction confirmation capabilities by removing the need for solving cryptographic puzzles that require processing power. Instead, network participants known as validators on PoS chains stake the blockchain’s native crypto asset into a smart contract. By doing so, they become a part of the block creation process. Most chains need a minimum amount of cryptocurrency to be staked to become a validator.

The staked crypto breeds good behaviour among validators, as behaviour, like not participating in the consensus mechanism or adding fraudulent transactions to blocks, can lead to the stake being slashed partially or completely. Moreover, validators are also incentivized for appropriate validation by rewards like those received by PoW mining. Transaction fees and newly minted cryptocurrency compensate for the efforts of validators and keep them working in the best interest of the network.

To create blocks on PoS blockchains, validators are chosen at random from the network by an algorithm. The chances of being chosen to create the block are proportional to the amount staked, thus being higher for validators with larger stakes. Once chosen, the validator simply creates a block, adds transactions to it, and submits it to the blockchain, where it is verified by the rest of the network. There is no work needed to be done on PoS chains, unlike PoW chains.

The Pros Of PoS

PoS blockchains, therefore, are much faster than PoW blockchains and allow blocks to be created and added in a fraction of the time needed to do so on PoW chains. Additionally, PoS blockchains are capable of onboarding scaling solutions like sharding much easier than their PoW counterparts. Such scaling solutions can allow the blockchain network to scale transaction throughputs to hundreds of thousands of transactions.

The Cons Of PoS

While the PoS consensus is becoming the way to go for developers building new blockchains, it does not come without its own issues. Because these chains allow network participants to validate blocks based on their stake, they bring about centralization concerns. It is easy for groups and corporations who possess massive financial backing to acquire a large number of the network’s coins and stake them for validation purposes. This makes it possible for these entities to gain control over the network, enabling them to bar transactions and thwart the permissionless nature of blockchain technology.

The Perfect Consensus Mechanism Is Not Here Yet But Will Be Soon

Proof-of-Work and Proof-of-Stake are two of the most widely used consensus mechanisms in the development of blockchain protocols. While both have their shortcomings, it is evident that much more developments are needed with the technologies that are so fundamental to the blockchain’s functioning.

As Proof-of-Work offers great security, it is better suited for cryptocurrencies like Bitcoin that are used to hold large value and occasionally transact rather than using it as a means of exchanging value. Thus, its low scalability and high transaction costs are not really of great concern to users mostly investing in it for the long term. Proof-of-Stake technology, on the other hand, is geared towards faster transaction capabilities and is being worked on by developers the world over to bring in higher levels of decentralization. This consensus mechanism is still in its experimental stages and its adoption by Ethereum will let us know how centralization hurdles can be tackled and if PoS is the future of blockchain consensus.

In the meantime, there are other consensus mechanisms being developed, too, like Proof-of-History and more. It will be interesting to see how these mechanisms are adopted and the challenges they face themselves. However, the large amounts of developments occurring are sure to bring a consensus mechanism that can solve the issues faced by blockchains of today.

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