PoW vs PoS

Have you ever wondered how cryptocurrencies like Bitcoin and Ethereum operate without the need for banks or other third parties to check transactions? Peer-to-peer digital transactions are made possible through consensus processes (how networks agree on transactions), such as Proof of Work (PoW) and Proof of Stake (PoS).

While both PoW and PoS are used in cryptography, they operate in somewhat different ways. This article will explain the distinction between Proof of Work and Proof of Stake in an easy-to-understand manner.

PoW versus PoS

In a PoW model, “miners” use their computer hardware to solve complex mathematical equations in exchange for the ability to add new groups of transactions (blocks) to the blockchain (record of all blocks and the transactions in them).

Only by solving these problems will a new block be added to the blockchain's last block. A miner is compensated with a block reward and transaction fees in the form of cryptocurrency, such as BTC, for being the first to solve one of these mathematical puzzles and add new transactions to the blockchain.

Proof of Stake operates in a unique way. Validators (also known by other names, such as "bakers" on Tezos) replace miners. To solve complex mathematical puzzles, these validators do not depend on hardware. Instead, they "stake" or lock up their cryptocurrency as protection for the right to check transactions.

In PoW systems, factors such as the size of the stake and how long the crypto has been staked help decide who gets the right to validate transactions, while in PoW systems, verification rights are usually determined by the mining or hashing power of the hardware. Similar to PoW, if you are fortunate enough to confirm a new block of transactions, you will be compensated with new cryptocurrency and/or transaction fees.

But why is there interest in other consensus structures like Proof of Stake if Proof of Work can control extremely common cryptocurrencies like BTC and ETH?

PoW vs PoS: Energy Consumption

When comparing Proof of Stake vs. Proof of Work, one of the most compelling points in favor of PoS is its low energy consumption. In PoW, miners must solve complex mathematical puzzles that take a lot of time to solve. To put it another way, their hardware consumes a lot of energy in order to fix those issues.

PoS, on the other hand, consumes very little power. This could be safer for the world in the long run, as crypto mining will almost certainly continue to expand in the future, due to cryptocurrency's promising future. This suggests that if we continue to use PoW, our energy consumption will increase as well.

PoW vs PoS: Decentralization

The fact that cryptocurrency is decentralized is one of its key tenets. You have a network of miners or validators instead of a single central authority, such as a bank, that is responsible for verifying transactions.

So, when it comes to decentralization, which is more decentralized: Proof of Stake or Proof of Work? Not everybody is interested in being a miner because it needs the procurement of hardware, technical know-how to set it up, and a lot of energy. Meanwhile, being a validator is much more straightforward, needing just a small amount of cryptocurrency.

However, Proof of Work is more decentralized than Proof of Stake in the sense that the cryptocurrency has a better chance of being spread across users. Miners must sell a portion of their earnings to cover operating expenses such as power.

Validators in PoS, on the other hand, have very little overhead, which means they can simply keep staking any incentives they receive, potentially leading to centralization and a lack of crypto asset distribution among users.

PoW vs PoS: Security

At least on Bitcoin, the first and oldest cryptocurrency, Proof of Work has proven to be resilient. Proof of Work has yet to fail in Bitcoin's more than a decade of life. Proof of Stake, on the other hand, may seem to be a smart idea in certain ways, but it isn't as well-proven or checked, which isn't ideal when people's money is on the line.

One of the most serious security issues with Proof of Stake is that when a blockchain forks or splits due to group disagreements, PoW miners must decide whether to guide their mining power against the newly forked blockchain or the original blockchain.

Splitting their mining power would be counterproductive, as it would offer them a lower chance of mining crypto on either chain. This discourages users from constantly forking in order to chase newly generated money at the expense of the network's reputation.

In the case of a fork, Proof of Stake allows validators to validate transactions on both blockchains that originate from the fork without any repercussions, as it does not require any additional resources, such as more mining power on a PoW crypto asset, to validate transactions on multiple forks of a PoS crypto asset.

As a result, users could easily generate a large number of forked cryptos using Proof of Stake. They might also “double spend” crypto by investing the same unit of crypto on one blockchain, then forking, or breaking from the old blockchain to build a new blockchain with no spending transaction. This helps them to invest their cryptocurrency unit once more (double spend).

The “nothing at stake” issue in PoS has been identified, and solutions such as lowering or confiscating stakes for poor conduct, such as signing off on several forks at once, have been suggested.

However, a 51 percent attack, or when a malicious agent or group takes majority control of the network, will be much more costly to conduct on PoS. Someone will have to buy loads of mining equipment in a PoW scheme, which is obviously costly.

Buying 51 percent of a PoS crypto's outstanding money, on the other hand, would be much more costly, because doing so might cause the price to skyrocket as more transactions were produced. This is due to the fact that purchasing all 51 percent at once is unlikely. Any transaction will raise the price of the cryptocurrency. Not to mention so purchasing that much cryptocurrency from a variety of sources would be extremely difficult, if not impossible.

PoW vs PoS: Conclusion

Two of the most common consensus frameworks for decentralized blockchain networks are Proof of Work and Proof of Stake. While some might argue that one is superior to the other, it's difficult to make the distinction in the case of Proof of Work vs. Proof of Stake - at least for the time being.

Proof of Stake is undeniably better in terms of lower energy usage (and therefore lower environmental impact); nevertheless, it is mostly untested, at least on the scale of Proof of Work, which has been tested on the famous Bitcoin network for over a decade.

Furthermore, there are likely benefits and drawbacks to Proof of Stake that we haven't considered. No one foresaw Bitcoin being so energy-intensive, for example, because the advanced mining devices used today, known as ASICs, did not exist until much later.

For the time being, it's safe to say that Proof of Stake is yet another intriguing development in the rapidly emerging blockchain space, and we're interested to see where it goes and how it affects the wider ecosystem.