Proof of Work vs Proof of Stake

Proof of Work vs Proof of Stake

Proof of Stake or Proof of Work, which is the best method for consensus, within a network that relies on the integrity of its validators?

Depending who you speak to your answer will be very different. And while they both serve a fantastic purpose, which consensus algorithm is better?

Proof of Work

Proof of Work (PoW) is the algorithm that many cryptocurrencies, such as Bitcoin, Litecoin and Ethereum uses to power its transactions.

It takes a lot of computing power, and ultimately uses up a lot of electricity, which many see as a major flaw for the PoW algorithms.

The idea was first introduced in 1993 to combat spam emails, but the technique went largely unused until Satoshi Nakamoto created Bitcoin in 2009.

Satoshi realized that this mechanism could be used to reach consensus between many nodes on a network, and so he introduced it as a way to secure the Bitcoin blockchain.

It started off with just him on his computer, but then it grew to a network of CPUs, and then GPUs, and now we have ASICs mining rigs that are highly powerful machines designed specifically for mining a certain cryptocurrency.

It has now got to the point where huge mining farms are being created and installed with thousands of these highly powered ASICs mining rigs, all done so these companies can compete for the rights to win the cryptocurrencies that are paid out as a reward to the miners.

Proof of Work

Therefore, the more electricity these companies burn the more they are rewarded, because they’re using more hashpower to help generate the network.

According to Digiconomist, just Bitcoin alone uses 77.78 terrawatt hours of electricity, which is roughly the same as Chile. And the more popular Bitcoin gets the more electricity it will use up.

Proof of Stake

Proof of Stake (PoS) is a newer and cleaner consensus algorithm. It was first introduced in a paper by Sunny King and Scott Nadal in 2012 and intended to solve the problem of Bitcoin mining’s high-energy consumption, and instead users validators to power the network.

Instead of miners burning the electricity, PoS uses an election process in which one node is randomly chosen by the network to validate the next block. And to have a chance of being chosen to validate a block, users have to stake some tokens in a special wallet.

The size of the stake determines the chances of being chosen to validate a block, so it also encourages users to invest more. For example, if you have invested $100 in a PoS cryptocurrency, but your friend has invested $1000, then your friend has a X10 chance of validating a block than you do.

It might not seem fair, and some say it favours the rich, but the truth is, most things favour the rich. Even PoW, favours the rich because they can buy more mining rigs than the poor. But in PoS, if a rich person wants to outcompete everyone and buys more tokens, then the value of everybody’s cryptocurrency is likely to go up.

Proof of Stake

It works in a similar way to PoW, but as a validator is chosen to validate the block, it’s presented to the other validators who then add it to the blockchain if they’re all in agreement.

Once they do, the chosen validator is paid the block reward, just as the miner is in a PoW cryptocurrency network.

How Can We Trust Validators?

Don’t forget, every person who stakes has to stake value in the system, and if anyone is caught trying to add fraudulent transactions, they will lose some of their stake. Therefore, as long as the stake is higher than their reward, we should be able to trust them to validate honestly.

If someone decides to stop validating, for whatever reason, they will have to unstake their cryptocurrencies, and wait a few days for them to be fully unstaked before using them. This time period is in place just in case a fraudulent transaction is discovered within a period of time after the validation of the block.

So the difference between proof of work and proof of stake are quite significant. PoS doesn’t use miners, and therefore uses considerably less electricity, and it’s also more decentralized.

You see, PoW has miners all around the world, and it is decentralized to a degree, but the problem is these miners work together in mining pools. They have to do this so they have enough hashpower to be able to compete for the block reward.

Proof of Stake

And the three biggest mining pools control more than 50% of the Bitcoin network. Think about that for a moment: the three biggest mining pools can actually take control of Bitcoin if they work together in a coordinated attack.

Conclusion

Proof of Work is the original idea behind ledger and blockchain technology. It served a purpose up to a degree, but the truth is, as PoW cryptocurrencies become more popular, they burn more electricity.

How long can this go on for? Bitcoin is a tiny part of the global economy, and it already uses the same amount of power that Chile does. Imagine if it was to become the reserve currency of the world.

It’s unimaginable how much electricity that would take to power, so it’s time not just Ethereum but Bitcoin also started shifting towards a PoS algorithm. It works, and its much cleaner, and is actually more decentralized than PoW.

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When I came up with Ethereum, my first first thought was, 'Okay, this thing is too good to be true.' As it turned out, the core Ethereum idea was good - fundamentally, completely sound