The two most popular consensus mechanisms for the validation of cryptocurrency transactions are, without a doubt, proof of work (PoW) and proof of stake (PoS). PoW is the original cryptocurrency consensus mechanism responsible for validating transactions on the Bitcoin blockchain. However, PoW mining is getting scrutinized due to the vast amounts of energy it requires. On the other hand, PoS consensus significantly reduces the amount of electricity needed to validate cryptocurrency transactions. Nonetheless, there are distinct advantages and disadvantages to each consensus mechanism. Hence, we’re going to compare the differences between proof of work vs proof of stake to establish the most sustainable option for long-term cryptocurrency mining.
This article dives deep into blockchain consensus mechanisms. Further, it explores the two most prominent consensus mechanisms, how they function, and the key differences between proof of work vs proof of stake. So, let’s get started!
What is a Consensus Mechanism?
Before we compare the differences between proof of work vs proof of stake, let’s take a moment to consider the role of consensus mechanisms in general. Because public blockchains are decentralized, they need a framework that enables all participants to agree on the validity of cryptocurrency transactions and the state of the distributed network. In essence, consensus mechanisms aim to ensure all participants act honestly and in the interest of the network.
Furthermore, consensus mechanisms are the backbone of blockchain security. As public blockchains have no central authority, they require network participants to update the public ledger on a regular basis. This allows blockchains to self-regulate by incentivizing honest behavior. Moreover, consensus mechanisms facilitate the secure transacting of cryptocurrencies without needing trusted third parties or intermediaries. The two most prominent methods for validating cryptocurrency transactions are proof of work (PoW) and proof of stake (PoS). Below, we look at these two consensus mechanisms in more detail.
Proof of Work (PoW)
The proof of work (PoW) consensus mechanism requires network participants to expend computing resources to prevent the double-spending of cryptocurrencies. PoW was first introduced by Hal Finney in 2004 using the SHA-256 hashing algorithm. Further, the first implementation of PoW was in 2009 on the Bitcoin blockchain, which saw Hal Finney become the recipient of the first-ever Bitcoin transaction.
PoW is a pioneering consensus mechanism that facilitates decentralized consensus for many first-generation blockchains. Each time a transaction broadcasts to a PoW blockchain, miner nodes must expend electricity (work) to solve a mathematical puzzle. The first miner to complete the puzzle earns the right to add a transaction to their block of transactions and append it to the blockchain.
When a miner verifies a transaction and can prove its legitimacy to the network, they get compensated for their efforts in the form of block rewards. Accordingly, network participants have an incentive to act honestly and not defraud the network because they would miss out on potential block rewards. Each node in the network has an almost identical copy of the blockchain ledger. As such, any attempts to defraud the network are easy to identify.
Hashing is a cryptographic method that facilitates the conversion of any type of data into a unique string of numbers. Furthermore, hashes are essential to PoW, as they enable network participants to detect tampering. As mentioned, Bitcoin and other PoW chains use the SHA-256 hash function. Moreover, when data gets placed through the SHA-256 hash function, it will generate a single hash. Any change to said data will result in an unrecognizable hash. Regardless of the data set, all hash outputs are the same length.
Furthermore, the SHA-256 hash function and many other hash functions are linear. This means it can’t fetch the original data fed into it. Instead, it can only check that the data it generates matches the original data. Moreover, to make this process less trivial, the Bitcoin network agrees on a difficulty level or “target hash” that determines how much “work” is required to generate a hash every ten minutes.
The target hash changes with increases and decreases in network participants. Miners generate hashes below the target using an integer called a “nonce”, which stands for “number used once”. When a miner lands on a valid hash, they broadcast it to the network before adding a block to the blockchain.
PoW mining is quite competitive. A new hash is broadcast to the Bitcoin network every ten minutes. However, the more “hash power” a miner has, the more likely they are to gain the opportunity to mine new blocks of transactions and earn the subsequent block rewards and transaction fees. Also, miners often pool resources together to increase their chances of winning.
Furthermore, Bitcoin mining requires specialized hardware and uses a lot of electricity. Currently, the most widely used Bitcoin miner is the “application-specific integrated circuit” (ASIC) miner. The more ASIC miners a participant has, the more likely they will win the next block. Because of this, several “mining farms” operate hundreds of ASIC miners simultaneously.
This type of mining makes it incredibly challenging to adjust or alter data once it appends to the blockchain. If any bad actor wanted to alter a transaction maliciously, they would have to re-mine every block in the blockchain. Any user who wanted to attempt to defraud the network would need a minimum of 51% of the network’s “hash power”, which would be extremely costly. Accordingly, the security of PoW chains increases over time as they grow.
If you want to gain a firm understanding of Bitcoin and blockchain technology, check out the Blockchain & Bitcoin 101 course at Moralis Academy. Here, we teach students everything they need to know before entering the domain of Web3. Kickstart your blockchain education today with Moralis Academy! Also, save our Web3 ebooks and blockchain guides to further expand your web3 knowledge!
Proof of Stake (PoS)
Proof of stake (PoS) is quickly becoming the go-to consensus mechanism for new cryptocurrency projects. Just like PoW, PoS is used to validate and secure cryptocurrency transactions on blockchain networks or other distributed databases. Rather than expending electricity in an attempt to solve a complex math problem, PoS relies on network participants locking up crypto assets (staking) in order to be selected to validate transactions. In many cases, PoS validators are selected according to the number of coins or tokens they stake, meaning the more you stake, the more likely you are to be selected.
Furthermore, PoS aims to address some of the issues associated with PoW. In particular, PoS uses considerably less energy when validating transactions compared to PoW. Also, many consider PoS chains less vulnerable to attacks compared to PoW chains. This is because the payoff for any successful attack is much less than an attack on a PoW chain because of how PoS networks structure transactions.
Although PoS validators are selected randomly, those who stake more have a higher chance of writing the next block onto the blockchain. Nonetheless, PoS requires much less computational power because validators are not competing against each other. Moreover, there are several implementations of PoS on various blockchains. Despite this, each PoS chain incentivizes honest behavior by requiring validators to lock up tokens. If a validator attempts to defraud the network, they risk losing their own stake. Below, we take a look at some of the most popular PoS variations to date.
Polkadot uses a “nominated proof of stake” (NPoS) consensus mechanism for selecting validators. Validators lock up DOT tokens and get nominated by others to produce new blocks of transactions using the “blind assignment of blockchain extension” (BABE) algorithm for finality guarantees.
Becoming a Polkadot validator is challenging and quite expensive. There are only 1,000 validator slots available. Nominators can select up to 16 validators, but they can’t decide the stake’s distribution between them. Validators compete in a disposal system by allocating DOT tokens to secure the network.
In the beginning, the distribution of DOT rewards is equal among all validators, regardless of their stake size. After the distribution of validator rewards, staking reward distributions are proportionate to stake size. However, minimum staking requirements change frequently, meaning that nominators may fall short of what is required to earn rewards.
EOS.IO, or just simply EOSIO, is a smart contract-enabled blockchain that powers the native EOS cryptocurrency. It aims to lower the barrier to entry for blockchain developers by providing a high transaction throughput and minimal fees. Also, users can create their own decentralized networks that harness the security of the main EOS chain.
Furthermore, EOS.IO uses the “delegated proof of stake” (DPOS) consensus mechanism to elect network validators. Also, network participants vote and elect delegates to validate each new block. Validators are selected according to their network activity, which incentivizes validators to maintain constant uptime. Additionally, the network uses an asynchronous Byzantine fault tolerance (aBFT) algorithm to ensure that transactions are irreversible after one second.
Moreover, EOS.IO uses block producers to create new blocks. Network participants vote on who they want to be block producers. Plus, voters gain more weight in their votes by staking more or of the native EOS cryptocurrency. However, at least 15 of the 21 block producers must approve all protocol changes, making it less decentralized than other models.
Initially, Ethereum was a proof of work blockchain. However, the number one smart contract blockchain is transitioning to a proof of stake consensus mechanism with the ongoing Ethereum 2.0 update. Ethereum is switching to PoS to enable it to scale without friction. However, they need to implement several changes before this can take place.
The Merge is a significant milestone in the Ethereum 2.0 roadmap. It saw the successful merging of the original mainnet on Ethereum with a new proof of stake chain known as Beacon Chain. Validators will be required to convert ETH tokens to ETH2 and stake it in order to earn rewards. However, Ethereum expects that ETH2 tokens will return to ETH after the update is complete.
Furthermore, validators are required to stake a minimum of 32 ETH. As more validators join the new Ethereum PoS chain, block validator rewards will decrease. Additionally, Ethereum 2,0 will see the introduction of sharding. Sharding involves splitting the blockchain into smaller partitions called “shards”. This process will help reduce congestion on the Ethereum network while lowering transaction fees for the majority of users.
Proof of Work vs Proof of Stake
Now it’s time to compare the differences between proof of work vs proof of stake. Both PoW and PoS consensus help blockchains synchronize data and validate transactions. However, there are some key differences between the two mechanisms. First, PoW involves a competition between validators, whereas some consider PoS blocks to be “forged” or “minted” rather than being mined. Also, PoW miners have to expend a significant amount of energy when competing for the right to add the next block. On the other hand, PoS is far less energy intensive.
Furthermore, because PoW chains use so much electricity and specialized equipment, such chains can be challenging to scale sustainably. Additionally, PoS chains often incur smaller transaction fees than PoW blockchains. Nonetheless, many consider PoS a sustainable and energy-efficient alternative to PoW.
Despite the scaling advantages PoS chains have over PoW chains, the former consensus mechanism could be a detriment to the decentralization of a chain. This is because whales can easily buy up a large number of tokens and become majority stakeholders. Also, PoW miners earn block rewards, whereas PoS validators earn validator rewards. Moreover, PoW chains tend to be slower than PoS chains. However, many consider this to be a security feature.
Additionally, PoS consensus substitutes computational power with staking. When it comes to attacking a blockchain network, PoS chains may be easier to exploit in a 51% attack than PoW, but attacking a PoS chain will likely result in a smaller payoff.
Learn the Difference: Proof of Work vs Proof of Stake – Summary
While PoW is a pioneering consensus mechanism, many in the field agree that it is not sustainable for all blockchain networks. PoS offers an environmentally friendly alternative that reduces network congestion, increases transaction speeds, and lowers transaction fees. Nonetheless, PoW could prove to be essential in maintaining the decentralization of some networks, such as the Bitcoin blockchain. As the proof of work vs proof of stake debate continues to evolve, we can expect to see more attention drawn to the scalability and decentralization of blockchain networks and which factors are the most important to the Web3 community.
Also, don’t forget to reach out to us on Twitter or Discord! We’d love to hear your thoughts about proof of work vs proof of stake. Additionally, check out our “Crypto Terminology” and “How to Invest During a Crypto Bear Market” articles to learn more about Web3!