Proof of Work vs Proof of Stake: Recently you might have heard about the idea to move from an Ethereum consensus based on the Proof of Work (PoW) system to one based on the so-called Proof of Stake.
In this article, I will explain to you the main differences between Proof of Work vs Proof of Stake and I will provide you a definition of mining, or the process new digital currencies are released through the network.
Also, what will change regarding mining techniques if the Ethereum community decides to do the transition from “work” to “stake”?
This article wants to be a basic guide to understanding the problem above. If you are looking for a more detailed walkthrough, please check out our blockchain courses on Ethereum.
What is the Proof of work?
First of all, let’s start with basic definitions.
Proof of work is a protocol that has the main goal of deterring cyber-attacks such as a distributed denial-of-service attack (DDoS) which has the purpose of exhausting the resources of a computer system by sending multiple fake requests.
The Proof of work concept existed even before bitcoin, but Satoshi Nakamoto applied this technique to his/her – we still don’t know who Nakamoto really is – digital currency revolutionizing the way traditional transactions are set.
In fact, PoW idea was originally published by Cynthia Dwork and Moni Naor back in 1993, but the term “proof of work” was coined by Markus Jakobsson and Ari Juels in a document published in 1999.
But, returning to date, Proof of work is maybe the biggest idea behind the Nakamoto’s bitcoin white paper – published back in 2008 – because it allows trustless and distributed consensus.
What’s trustless and distributed consensus?
A trustless and distributed consensus system means that if you want to send and/or receive money from someone you don’t need to trust in third-party services.
When you use traditional methods of payment, you need to trust in a third party to set your transaction (e.g. Visa, Mastercard, PayPal, banks). They keep their own private register which stores transaction history and balances of each account.
The common example to better explain this behavior is the following: if Alice sent Bob $100, the trusted third-party service would debit Alice’s account and credit Bob’s one, so they both have to trust this third-party is to go do the right thing.
Proof of work and mining
Going deeper, proof of work is a requirement to define an expensive computer calculation, also called mining, that needs to be performed in order to create a new group of trustless transactions (the so-called block) on a distributed ledger called blockchain.
Mining serves as two purposes:
To verify the legitimacy of a transaction, or avoiding the so-called double-spending;
To create new digital currencies by rewarding miners for performing the previous task.
When you want to set a transaction this is what happens behind the scenes:
Transactions are bundled together into what we call a block;
Miners verify that transactions within each block are legitimate;
To do so, miners should solve a mathematical puzzle known as proof-of-work problem;
A reward is given to the first miner who solves each blocks problem;
Verified transactions are stored in the public blockchain
This “mathematical puzzle” has a key feature: asymmetry. The work, in fact, must be moderately hard on the requester side but easy to check for the network. This idea is also known as a CPU cost function, client puzzle, computational puzzle or CPU pricing function.
All the network miners compete to be the first to find a solution for the mathematical problem that concerns the candidate block, a problem that cannot be solved in other ways than through brute force so that essentially requires a huge number of attempts.
When a miner finally finds the right solution, he/she announces it to the whole network at the same time, receiving a cryptocurrency prize (the reward) provided by the protocol.
From a technical point of view, the mining process is an operation of inverse hashing: it determines a number (nonce), so the cryptographic hash algorithm of block data results in less than a given threshold.
This threshold, called difficulty, is what determines the competitive nature of mining: more computing power is added to the network, the higher this parameter increases, increasing also the average number of calculations needed to create a new block. This method also increases the cost of the block creation, pushing miners to improve the efficiency of their mining systems to maintain a positive economic balance. This parameter update should occur approximately every 14 days, and a new block is generated every 10 minutes.
Proof of work is not only used by the bitcoin blockchain but also by ethereum and many other blockchains.
Some functions of the proof of work system are different because created specifically for each blockchain, but now I don’t want to confuse your ideas with too technical data.
The important thing you need to understand is that now Ethereum developers want to turn the tables, using a new consensus system called proof of stake.
What is Proof of stake?
Proof of stake will make the consensus mechanism completely virtual. While the overall process remains the same as proof of work (POW), the method of reaching the end goal is entirely different. In POW, the miners solve cryptographically hard puzzles by using their computational resources.
In POS, instead of miners, there are validators. The validators lock up some of their Ether as a stake in the ecosystem. Following that, the validators bet on the blocks that they feel will be added next to the chain. When the block gets added, the validators get a block reward in proportion to their stake.
Ethereum finally transitioned from PoW to PoS on September 15, 2022, via an event called the “Merge.” During the Merge, the original PoW Ethereum chain combined (or merged) with the PoS beacon chain, which has been operational since 2020. The Merge was done in various stages to ensure that the transition went off without a hitch. Prior to the mainnet deployment, the Merge was successfully executed on various Ethereum testnets, such as Ropsten and Goerli. There were multiple delays in the Merge implementation since the developers wanted to perfect the launch as much as possible. Ethereum stakers must stake at least 32 ETH in the protocol to participate in the consensus process.
Following the Merge, Ethereum will go through various updates, such as the Verge, Surge, Purge, and Splurge, making Ethereum faster and significantly more efficient. Following the Merge, many have criticized Ethereum for becoming more centralized since Lido Finance and Coinbase own >40% of the staking power. However, it must be noted that before the Merge, three mining pools owned >50% of the overall network hashrate in Ethereum.
How are forgers selected?
If Casper (the new proof of stake consensus protocol) will be implemented, there will exist a validator pool. Users can join this pool to be selected as the forger. This process will be available through a function of calling the Casper contract and sending Ether – or the coin who powers the Ethereum network – together with it.
“You automatically get inducted after some time,” explained Vitalik Buterin himself on a post shared on Reddit.
“There is no priority scheme for getting inducted into the validator pool itself; anyone can join in any round they want, irrespective of the number of other joiners,” he continued.
The reward of each validator will be “somewhere around 2-15%, ” but he is not sure yet.
Also, Buterin argued that there will be no imposed limit on the number of active validators (or forgers), but it will be regulated economically by cutting the interest rate if there are too many validators and increasing the reward if there are too few.
A safer system?
Any computer system wants to be free from the possibility of hacker attacks, especially if the service is related to money.
So, the main problem is: proof of stake is safer than proof of work?
Experts are worried about it, and there are several skeptics in the community.
Using a Proof-of-Work system, bad actors are cut out thanks to technological and economic disincentives.
In fact, programming an attack to a PoW network is very expensive, and you would need more money than you can be able to steal.
Instead, the underlying PoS algorithm must be as bulletproof as possible because, without especially penalties, a proof of stake-based network could be cheaper to attack.
To solve this issue, Buterin created the Casper protocol, designing an algorithm that can use the set some circumstances under which a bad validator might lose their deposit.
He explained: “Economic finality is accomplished in Casper by requiring validators to submit deposits to participate, and taking away their deposits if the protocol determines that they acted in some way that violates some set of rules (‘slashing conditions’).”
Slashing conditions refer to the circumstances above or laws that a user is not supposed to break.
Security Aspects in PoW and PoS
Examination of security features inherent in both consensus mechanisms
Two popular consensus mechanisms that are often compared are Proof of Work (PoW) and Proof of Stake (PoS). Let’s take a closer look at the security features inherent in both approaches.
In Proof of Work, miners compete to solve complex mathematical puzzles in order to validate transactions and add them to the blockchain. This process requires significant computational power and energy consumption. The security lies in the fact that for an attacker to successfully manipulate the blockchain, they would need to control more than 50% of the network’s computing power. This is known as the “51% attack” and is highly unlikely due to the massive resources required.
On the other hand, Proof of Stake relies on validators who hold a certain amount of cryptocurrency as collateral or stake. Validators are chosen randomly based on their stake, and they have a higher chance of being selected if they hold more coins. In this system, attackers would need to acquire a majority stake in order to manipulate transactions. However, this would require purchasing a significant amount of cryptocurrency, which can be expensive and impractical.
Discussion on vulnerabilities associated with each approach
While both PoW and PoS have their own strengthsThey also come with vulnerabilities that attackers could potentially exploit.
In Proof of Work, one vulnerability is the possibility of a 51% attack. If an attacker gains control over more than half of the network’s computing power, they could potentially rewrite transaction history or double-spend coins. Another concern is mining centralization, where large mining pools dominate the network’s computational power. This concentration creates potential risks such as collusion or manipulation by these centralized entities.
Proof of Stake has its own set of vulnerabilities as well. One such vulnerability is known as the “nothing-at-stake” problem. Since validators don’t have to invest significant computational resources like miners in PoW, they could potentially validate multiple conflicting blocks simultaneously without any cost. This creates a risk of network fragmentation and reduces the security of the blockchain.
Analysis on the resilience against various attack vectors
Both PoW and PoS consensus mechanisms have been designed to be resilient against various attack vectors, but they approach security in different ways.
In PoW, the massive computational power required to solve puzzles makes it highly resistant to brute force attacks.
Impact on Energy Consumption
Evaluation of Energy Consumption Levels
There is a clear distinction between Proof of Work (PoW) and Proof of Stake (PoS) systems. In PoW, miners must solve complex mathematical puzzles to validate transactions and secure the network. This process requires significant computational power and consumes a substantial amount of electricity. On the other hand, PoS operates differently by allowing participants to validate blocks based on their stake in the cryptocurrency. This eliminates the need for intensive computational work, resulting in significantly lower energy consumption compared to PoW.
Comparison Regarding Environmental Implications
The environmental implications of PoW and PoS are quite contrasting. Due to its energy-intensive nature, PoW has been criticized for its high carbon footprint and contribution to climate change. The massive amounts of electricity required for mining operations often come from non-renewable sources such as coal or natural gas, further exacerbating environmental concerns.
In contrast, PoS offers a more environmentally friendly alternative. Since it does not rely on extensive computational work, it consumes considerably less energy compared to PoW systems. As a result, the carbon emissions associated with validating transactions are significantly reduced. This makes PoS a more sustainable option that aligns with efforts towards mitigating climate change and promoting greener practices.
Consideration of Potential Solutions
While PoS presents a more energy-efficient approach compared to PoW, there are still potential solutions that can further mitigate energy usage in PoW systems. One such solution is the exploration of renewable energy sources for powering mining operations. By transitioning towards renewable sources like solar or wind power, the environmental impact can be minimized while maintaining network security.
Another potential solution lies in implementing technological advancements that optimize mining hardware’s efficiency. By developing more efficient algorithms or utilizing specialized hardware designed specifically for mining purposes, the overall energy consumption can be reduced without compromising network security.
Some cryptocurrencies have started exploring hybrid consensus mechanisms that combine the benefits of both PoW and PoS. These hybrids aim to strike a balance between security, energy efficiency, and decentralization. By incorporating elements of PoS into a PoW system, it is possible to reduce energy consumption while still maintaining robust network security.
Choosing Between PoW and PoS Cryptocurrencies
One crucial factor to consider is the consensus mechanism it employs. Two popular mechanisms are Proof of Work (PoW) and Proof of Stake (PoS). Understanding the trade-offs between these two mechanisms is essential for making an informed decision. Let’s explore the factors to consider when choosing between PoW and PoS cryptocurrencies.
Factors to Consider When Selecting a Cryptocurrency
Security: One of the primary concerns in any cryptocurrency system is security. PoW cryptocurrencies, such as Bitcoin, have proven their robustness over time. The computational power required for mining makes them highly resistant to attacks. On the other hand, PoS cryptocurrencies rely on validators who hold a certain stake in the network. While they offer different security models, it’s important to assess which mechanism aligns better with your project’s security requirements.
Efficiency: Another aspect to evaluate is efficiency. PoW systems require significant computational resources, resulting in high energy consumption and slower transaction speeds compared to PoS networks like Ethereum 2.0. If scalability and faster transactions are crucial for your project, a PoS mechanism might be more suitable.
Decentralization: Decentralization ensures that no single entity has control over the network, promoting transparency and trustlessness. While both PoW and PoS aim for decentralization, there are nuances to consider. In PoW systems, miners compete against each other using computational power, leading to a distributed network of nodes securing the blockchain’s integrity. In contrast, PoS networks rely on validators who often need a minimum stake in tokens or coins to participate actively in consensus decisions.
Trade-offs Between Security, Efficiency, and Decentralization
Choosing between Proof of Work and Proof of Stake involves striking a balance between security, efficiency, and decentralization.
Security vs Efficiency: While both mechanisms offer security, PoW is known for its proven track record. However, it comes at the cost of high energy consumption and slower transaction speeds. PoS networks, on the other hand, provide faster transactions and consume significantly less energy but may be perceived as less battle-tested.
Efficiency vs Decentralization: PoS networks generally offer better scalability and higher transaction throughput compared to PoW systems. However, some argue that they may sacrifice decentralization due to the concentration of power in the hands of validators with large stakes.
In conclusion, the debate between proof of work (PoW) and proof of stake (PoS) consensus mechanisms is a critical one in the world of blockchain technology. Both PoW and PoS have their advantages and disadvantages, with PoW being more secure but energy-intensive, while PoS offers energy efficiency but may be prone to centralization. Understanding these differences is crucial for anyone looking to invest in or develop cryptocurrencies.
It is clear that there is no one-size-fits-all solution. The decision should be based on the specific needs and goals of a project. While PoW has proven itself over the years with the success of Bitcoin, PoS is gaining traction as a more sustainable alternative. As the blockchain industry continues to evolve, it is essential for developers and investors alike to stay informed about these consensus mechanisms and their implications.
To make an informed choice, take into account factors such as security requirements, environmental impact, scalability, and decentralization goals. Consider consulting experts in the field or engaging in further research to deepen your understanding. By doing so, you can contribute to the advancement of blockchain technology while aligning with your own values and
What is proof of work (PoW) and proof of stake (PoS)?
Proof of work (PoW) is a consensus algorithm used in blockchain networks, where participants solve complex mathematical puzzles to validate transactions and create new blocks. Proof of stake (PoS), on the other hand, relies on participants “staking” their cryptocurrency as collateral to be selected as validators and create new blocks.
How does proof of work ensure security?
In proof of work, miners compete to solve mathematical puzzles, requiring significant computational power. This competition makes it extremely difficult for any malicious actor to control the network since they would need more computational power than all honest participants combined.
What are the advantages of proof of stake over proof of work?
Proof of stake offers several advantages over proof of work. It consumes significantly less energy since there is no need for extensive computational calculations. It reduces the risk of centralization by not favoring those with more resources like mining hardware.
Does proof of stake have any drawbacks?
One potential drawback is the “nothing at stake” problem, where validators have no cost associated with validating multiple chains during a fork. However, this can be mitigated through various mechanisms such as slashing or penalties imposed on validators who act maliciously.
Which consensus algorithm is better: PoW or PoS?
The choice between PoW and PoS depends on various factors like network goals, scalability needs, and environmental concerns. While PoW has proven its security over time, PoS offers energy efficiency and scalability advantages. Ultimately, it’s up to developers and stakeholders to evaluate which algorithm aligns best with their specific requirements.