Proof Of Work vs Proof Of Stake: Pros and Cons of Both

13.05.2024

5min.

1186

As you progress in trading, there is a need to learn more about the assets you trade. Surely you yourself are interested in learning more about their algorithms. In the process of studying the topic, you may have learned that some cryptocurrencies work on the Proof of Work (PoW) algorithm and some on the Proof of Stake (PoS) algorithm. In this article, we will analyze in detail the differences between them, including all technical characteristics and aspects. Are you ready? Read carefully!

What is Proof of Work

When you hear Proof of Work, Bitcoin probably comes to mind. Conceived by Satoshi Nakamoto, PoW is not just an algorithm, it’s an innovation, and there would be no crypto without it. It lays the cornerstone for the security and integrity of blockchain networks. In addition to Bitcoin, PoW is used in blockchains of Litecoin, Dogecoin, Monero, Ethereum Classic, and many others.

In PoW, miners compete to solve complex mathematical tasks — a process known as mining. The first to crack the code gets to add the next block to the blockchain and reap the rewards. To crack the code, you need to solve the cryptographic puzzle. But don't be too presumptuous. Even if you pass all the levels in mobile puzzles with three stars, you can't handle it. Even your personal computer can’t. Solving these puzzles demands immense computational power, so you will need a lot of expensive and very powerful equipment: sets of GPUs or ASICs. The sheer volume of energy consumption makes Proof of Work both a technological marvel and a subject of criticism.

This is the basic mechanics. Enough for now. We will talk more about the PoW algorithm a little later in this article.

Proof of Stake, a brainchild of Sunny King and Scott Nadal, debuted in 2012 as a greener alternative to PoW. PoS does away with mining entirely. Instead of racing to solve puzzles, validators are chosen to create new blocks based on the number of coins they hold and are willing to “stake” as collateral. Today, PoS is used by Ethereum, Cardano, Solana, Polygon, and others.

This seemingly simple shift has profound implications. In PoS, your mining power springs from the proportion of coins you hold. You're essentially putting skin in the game. With a vested interest, validators are incentivized to play by the rules.

More details about the mechanics of the work will be below.

Difference between Proof of Work and Proof of Stake

###Proof of Work vs Proof of Stake

Examples:

Proof of Work (PoW): Bitcoin, Litecoin, Dogecoin, Ethereum Classic, and more.
Proof of Stake (PoS): Ethereum, Tron, Polygon, Solana, Cardano, and more.

Block Creation:

PoW: Competitive Mining
PoS: Staking & Selection Process

Energy Consumption:

PoW: High (e.g., Bitcoin consumes ~127 TWh/year)
PoS: Low (e.g., Ethereum’s estimated consumption is 6.56 GWh/year)

Rewards:

PoW: Block Rewards & Transaction Fees
PoS: Staking rewards (percentage of the staked amount) & Transaction Fees

Vulnerabilities:

PoW: “50%+1” attack
PoS: “Fake stake” attack

Initial Distribution:

PoW: Mining
PoS: Pre-mined, ICO, or IEO

Incentive:

PoW: Solving puzzles faster
PoS: Holding & Staking Coins

Scalability:

PoW: Lower (e.g., Bitcoin ~7 transactions/second, Dogecoin ~70 transactions/second)
PoS: Higher (e.g., Ethereum ~30 transactions/second, Polygon ~7,000 transactions/second)

Consensus Latency:

PoW: 10 Minutes (Bitcoin)
PoS: Typically lower than PoW

Hardware Requirement:

PoW: Specialized ASICs or GPUs
PoS: Generalized computing hardware

Network Participation:

PoW: Open mining
PoS: Often requires a minimum amount of coins for staking

Block Verification:

PoW: Every node verifies
PoS: Selected validators verify

Long-Term Sustainability:

PoW: Concerns due to energy consumption
PoS: More sustainable

Governance:

PoW: More decentralized but harder to evolve
PoS: Easier to implement governance changes

Attack Cost:

PoW: Extremely high
PoS: High, but depends on staked assets

Usage:

PoW: Mostly implemented in “old school” blockchains
PoS: Mostly used in new blockchains

*Check up-to-date Bitcoin data on Look Into Bitcoin

How does Proof of Stake (PoS) work

So, it’s time to dive deeper. How does Proof of Stake work? At its core, Proof of Stake is about validators and staking. Instead of miners competing with computational power as in PoW, PoS networks select validators (sometimes referred to as “forgers”) in a deterministic manner.

Validators are chosen to create new blocks based on various selection algorithms, which generally take into account the amount of cryptocurrency staked and other factors.

Randomized Block Selection. Some PoS algorithms use a combination of factors, such as the staker’s wealth and a randomized process, to select the block creator. For instance, a validator with more coins staked is more likely to be chosen, but randomness makes sure the wealthiest validators don't have absolute power.
Coin Age Selection. In this option, the selection process considers how long the coins have been staked. Coin age is the number of coins multiplied by the number of days the coins have been held. Validators with older coins are prioritized. Once they validate a block, the coin age is reset.

When a validator is chosen to forge a block, they validate the transactions, place them in a block, and add it to the chain. In exchange, the validator receives the transaction fees associated with that block as a reward. Blockchains use launchpads to interact with the validators. For example, Ethereum has its Ethereum Launchpad.

In PoS, validators have a vested interest in properly confirming transactions, as they have something at stake — their own holdings. However, if they validate fraudulent transactions, they lose a part of their stake and their right to participate as a validator in the future. This financial incentive is crucial in ensuring the integrity of the network.

That is, in mining, more than 50% of miners must confirm the transaction, and in staking, one randomly selected staker must confirm it. It may seem that Proof of Stake is less reliable, and it really is. However, in reality, it’s almost impossible to compromise any of these algorithms, so both methods are trusted.

What's intriguing is that PoS opens the doors for various hybrid models like Delegated Proof of Stake (DPoS), where stakeholders vote for a few representatives to validate on their behalf, streamlining the process. DPoS is used in Tron, EOS, and some other coins. Many of these tokens are available on WhiteSwap DEX.

How does Proof of Work (PoW) work

Proof of Work blockchain, in contrast, makes it about brute computational force. As written above, Proof of Work revolves around the concept of solving a cryptographic puzzle to create a new block. The “work” is essentially a computational effort that miners undertake by using hardware to solve complex mathematical problems.
Mining Process. The mining process begins when miners gather transactions from the memory pool, which is a collection of transactions waiting to be confirmed. They then structure them into a temporary “candidate” block.
Solving the Puzzle. The main task for miners is to find a hash that satisfies specific conditions, which is essentially solving a cryptographic puzzle. The hash is a fixed-size string of characters produced by a hash function using the contents of the block.
The puzzle usually involves finding a hash that is below a certain target value. Since the output of the hash function is unpredictable, the only way to solve this is by brute force — trying out different inputs until the desired hash is found. Bitcoin hash example: 000000000020x6679c085ag166831e934ff763ae46a2a6c172b3f1b60a8ce26f. Block Verification. Once a miner solves the puzzle, they broadcast the block to the network for verification. Other nodes on the network will check if the hash indeed satisfies the required conditions.
Block Addition. If the network confirms that the solution is correct, the new block is added to the blockchain. This process is known as finding or mining a block. Block Reward. The miner who successfully mined the block is rewarded with a certain number of newly minted cryptocurrency (called the block reward) and transaction fees from the transactions included in the block. This is the incentive for miners to lend their computational power to the network. The Bitcoin block reward at the moment is 6.25 BTC, and the transaction fees are volatile.

Mining data is transparent, and anyone can monitor it using an explorer.

The security of PoW networks is maintained through the sheer amount of work required to add new blocks. A potential attacker would need to control more than 50% of the network's total hashing power to manipulate the blockchain successfully. This is known as a 51% attack and is economically unfeasible in large networks like Bitcoin, so it has never happened yet. So, while energy consumption remains a concern, PoW has proven to be a reliable and secure method for achieving consensus in decentralized networks.

Proof of Work vs Proof of Stake: pros and cons of both

Proof of Work and Proof of Stake, both colossal in their own rights, come with their unique set of advantages and disadvantages. As a professional crypto trader, you should be imperative to scrutinize these aspects meticulously.

Proof of Work (PoW) Pros

Robust security. The 50%+1 attack, where an entity would need to control over half the network's hashing power to manipulate it, is virtually infeasible due to high costs.

Proof of Work (PoW) Disadvantages

Energy intensive. The vast amounts of electricity consumed by PoW networks, especially Bitcoin, have garnered criticism and environmental concerns. In 2023, Bitcoin alone consumes more electricity than the entire Czech Republic.
Hardware cost. The need for specialized ASICs or GPUs for mining creates a high barrier to entry.

Proof of Stake (PoS) Pros

Energy efficiency. PoS consumes significantly less energy, making it environmentally sustainable.
Scalability. Due to the absence of mining, PoS networks can process transactions faster and handle a larger volume.
Lower entry barrier. Participants don’t need specialized hardware, making it easier to become a validator.

Proof of Stake (PoS) Disadvantages

“Nothing at stake” problem. Validators might have little incentive to validate blocks.
Centralization risk. Wealthy participants who own a significant portion of the cryptocurrency might have disproportionate power in the network.

When should PoW or PoS be used

The choice between PoW and PoS is not a one-size-fits-all scenario. It depends on the goals of your blockchain project. If security is the top priority, PoW might be your go-to. On the other hand, if you seek energy efficiency, scalability, and a lower entry barrier, PoS is more appealing. Today, Proof of Work is becoming less and less popular. Most of the popular mining-based blockchains (namely, Bitcoin, Litecoin, and Dogecoin) were launched in the 00s or early 10s before PoS gained popularity.

Other Algorithms

It might seem that PoW and PoS are the only possible consensus algorithms, but they are not. As of July 2023, PoW-based coins occupy about 50% of the crypto market, PoS-based coins occupy about 30%, and the remaining 20% are coins with other types of consensus algorithms.

Proof of Authority (PoA)

This is a more centralized PoS variant, PoA bestows block validation rights to designated authorities (validators). Best suited for private networks, PoA touts speed and energy efficiency but at the cost of decentralization.

Proof of Space (PoSpace) or Proof of Capacity (PoC)

Here, the mining process is dependent on the amount of disk space allocated by miners. Networks like Chia are treading this path, purporting to be greener alternatives to PoW.

Proof of Elapsed Time (PoET)

An algorithm primarily associated with Intel’s Sawtooth blockchain platform, PoET allocates mining rights based on the elapse of randomly assigned time. It’s seen as a fair and energy-efficient approach.

Proof of Burn (PoB)

This interesting algorithm involves “burning” or rendering coins unspendable. It simulates the resource expenditure of PoW but without the need for extensive computational work. Unlike many algorithms that increase the number of tokens in circulation over time, PoB, on the contrary, decreases their turnover by burning. Long-term investors appreciate it.

What algorithms are used in Ethereum, Tron, and Polygon

Ethereum and Polygon use the PoS algorithm, and Tron uses DPoS. However, when it comes to trading, there is no difference between Proof of Work and Proof of Stake / DPoS for a trader. On WhiteSwap, you can switch between these networks and convert tokens equally easily on any network.

Conclusion: Proof of Work vs Proof of Stake

Proof of Work ushered in the blockchain revolution with unassailable security but at the expense of scalability and energy consumption. Proof of Stake emerged as a shrewd successor, alleviating energy concerns and offering better scalability. However, it's not without its own set of quandaries, such as the “Nothing at Stake” problem and potential centralization.

The burgeoning array of alternatives showcases a relentless quest for the diamond of consensus algorithms. Perhaps we will find it one day. What do you think?

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