Proof-of-work vs proof-of-stake
- Blockchain consensus mechanisms serve as the verification and security standards used by public blockchains. With consensus mechanisms, network nodes ensure blocks of new transactions are valid before broadcasting them to the network.
- Proof-of-work vs proof-of-stake is a very common comparison for crypto investors, because these are the two most widespread consensus mechanisms.
- Both systems use resources to secure the network and verify transactions. Proof-of-work uses computational power, while Proof-of-stake uses staked cryptocurrency.
- Both consensus mechanisms are widely used by some of the most popular blockchains in the world and there’s still no clear winner in sight.
The crypto ecosystem is worth nearly $2.3 trillion and is projected to continue growing in the years to come. Public blockchains like the Bitcoin network, the Ethereum network and many others, all secure themselves by using a consensus mechanism – a set of rules governing how new blocks of transactions are added to the chain without any distortion to the network. Understanding how these two major systems work is crucial for anyone thinking of investing in crypto, as it enables unique insight into the strenghts, weaknesses and future of the blockchain.
In this article, we’ll compare the two most commonly used consensus mechanisms; proof-of-work and proof-of-stake, giving you a clear picture of how each one works and key differences.
Proof-of-work vs proof-of-stake – what’s the difference?
Let’s start with a high level overview. Despite serving the same purpose, proof-of-work and proof-of-stake differ along a few key faultlines. These include
- The resource they use to achieve security
- Barriers to entry for nodes
- How new blocks of transactions are published
- The energy efficiency of each system
Resources
Each system requires its nodes to provide some sort of collateral in order to participate. This collateral is what keeps each system safe.
Proof-of-work requires miners to provide computational power to solve complex mathematical problems and earn block rewards. By contrast, proof-of-stake requires validators to stake their coins o the network in order to start validating.
In both cases, the objective is to prevent a 51% attack, where a malicious party controls over 50% of the network via either computational power or staked crypto. By forcing all of the network’s mining or validating nodes to contribute resources, each system makes it incredibly difficult for one single entity to seize control.
Barriers to entry
Proof-of-work requires specialized equipment. For some blockchains that can be the graphics card of your computer, for others it’s an application-specific integrated circuit (specialized miner). Both are types of hardware that users must own to partake in mining, or the process of adding new blocks of transactions to the blockchain.
With proof-of-stake, there is no need for specialized equipment, other than a consumer grade computer and an internet connection. There is, however, a minimum amount of coins that have to be staked. For example, in the Ethereum network, validator nodes need to stake 32 ETH on the network before they can begin participating – this is the equivalent of more than $100K at the time of writing.
How new blocks are added
In proof-of-work, new blocks are added through a process known as mining. Participants in the mining process compete to be the first to solve a complex mathematical puzzle, giving them the right to add a new block. The winning miner takes the block reward.
By contrast, the proof-of-stake consensus mechanism will select a validator to confirm transactions on the network and create new blocks. The more ETH the validator has staked in the network, the more often they will be selected to add new blocks. The competitive element of proof-of-work is absent here as validators are chosen according to a set of rules
Energy efficiency
Proof-of-work mining is deliberately very heavy on computational power. It requires every miner to use energy to compete, while only one can actually win. This is what prevents a bad actor from gaining control of the network.
Proof-of-stake’s energy requirements are just a fraction of what miners on proof-of-work use. This is because the network selects validators via their stake in the network, rather than making the whole community compete for each new block. After Ethereum’s switch from proof-of-work to proof-of-stake, the network reduced its power consumption by 99.9%.
What is proof-of-work? A closer look
Proof-of-work is a blockchain consensus mechanism that necessitates substantial computational effort from a network of devices. Hal Finney adapted this concept for digital tokens in 2004 through the idea of “reusable proof of work”, using the 160-bit Secure Hash Algorithm 1 (SHA-1). So how does proof-of-work function?
Proof-of work explained
Proof of work is a system of incentives and deterrents that ensures new bocks of transactions are continually mined, while the network remains secure. The process involves some key concepts: miners, blocks of transactions, hash functions and block rewards.
Every new block of transactions has a hash function. This is an equation that incorporates all of the data already published to the blockchain, as well as the data within the new block.
The new block is proposed to the network’s miners, who are tasked with “solving” the equation using their computational power. The miner who successfully solves the puzzle adds the new block to the blockchain and will receive rewards as an incentive for doing so.
51% attacks
The main risk for proof-of-work systems is a 51% attack, when an entity accrues more than half of the network’s hash power and manipulates the blockchain. However, the system makes this practically impossible. Accumulating more than half of a network’s total power would be astronomically expensive, rendering it extremely difficult and unprofitable to hijack the network.
Some of the biggest and most well-known networks that utilize proof-of-work include Bitcoin, Bitcoin Cash, Bitcoin SV, Litecoin, Dogecoin, Ethereum Classic, Monero, Kaspa, Conflux Network and others.
Hot TopicAdvantages of proof-of-work
The popularity of proof-of-work is proof that the consensus mechanism still has good use cases.
- High Level of Security
There are hundreds of thousands of miners on Bitcoin and manipulating the network is borderline impossible through a 51% attack. Smaller networks might be more vulnerable to it though.
- Offers Network Security Without a Central Authority
Each miner is a separate participant and validator in the transaction validation process. This makes proof-of-work transparent, decentralized and secure.
- Block Rewards
For providing computational power, miners receive block rewards in the form of the network’s native coin.
Disadvantages of proof-of-work
Ever since the inception of Bitcoin, the proof-of-work consensus mechanism has received some criticism in more than one area.
- High Power Consumption
The biggest criticism of proof-of-work is its high energy usage. The whole network must compete,yet only one miner can “win” each block. As a result, the vast majority of miners don’t work alone, but contribute to a mining pool in order to compete. According to the U.S. Energy Information Administration, the mining of cryptocurrencies makes up for 0.6 to 2.3 percent of the nation’s total electricity use.
- Becoming more centralized
With proof of work requiring miners to compete to be the fastest, individual miners tend to form large pools to be in with a chance of winning. This can lead to the mining network becoming more centralized, with just a few enormous mining pools controlling the majority of the network’s hash power.
- Slow Transactions & Limited Scalability
For all the numerous miners on its network, Bitcoin can only handle around 7 transactions per second. With proof-of-work, more miners don’t mean higher transaction speeds
- Expensive Equipment
There are no other requirements to participate, aside from having the necessary hardware. However, this hardware can be costly as application-specific integrated circuit (ASIC) miners can be in the range of thousands of dollars.
What is proof-of-stake? A closer look
In proof-of-stake consensus mechanisms, miners are replaced with validators. They validate new blocks and receive rewards in the form of the network’s native coins, based on their staked amount.
How does proof-of-stake operate?
In a proof-of-stake based system, validators are the entities responsible for adding new blocks of transactions to the blockchain chain. However, unlike ‘mining’ the process has no competitive element. Instead of making the whole network compete to add new blocks, the network chooses validators in proportion to how many coins they have staked. The more you’ve staked, the more times you’ll be chosen to add a new block.
Validators receive rewards for adding new blocks, which are really the gas fees charged by the network for all of the transactions in the block.
Staking
Users can become validators by locking a certain amount of their tokens on the network. For Ethereum, that’s 32 ETH. This amount functions as collateral, and the network uses it for something called slashing.
Slashing
Slashing is a method of punishing bad behavior from validators. For example, if a node tries to validate the same block twice, or has long periods of “down time”, the network slashes (removes) a portion of their staked coins. So slashing is a deterrence mechanism that makes it unprofitable for validators to try to cheat the network. The approach seems to be working as only 434 validators on the Ethereum network out of 1,174,000 were ever slashed.
Some of the most popular blockchains that use proof-of-stake include Ethereum, Avalanche, Binance Network, Solana, Cardano, Polkadot, Tezos, Cosmos and others. Ethereum used to be on proof-of-work but all that changed with The Merge upgrade. By switching to proof-of-stake, Ethereum laid the path for more future upgrades in hopes of solving its scalability issues.
Advantages of proof-of-stake
What makes the proof-of-stake consensus mechanism a good choice?
- Energy efficient
Proof-of-stake achieves security using significantly less energy than proof-of-work. When Ethereum switched to PoS, the power draw of the network was reduced by 99.9%.
- Higher Speed
With PoS, there are no puzzles to be solved so new blocks tend to be created faster. Block times on the Ethereum proof-of-stake system sit at around 12 seconds; for comparison, Bitcoin creates a new block every 10 minutes.
- Better Scalability
With proof-of-stake it is much easier to scale since proof-of-stake blockchains are more compatible with solutions such as sharding. With sharding, the network divides into smaller groups called “shards”. Each shard can independently process transactions while also retaining the same level of security, providing much better scalability. With its switch to proof-of-stake, Ethereum has plans to implement sharding and reach 100,000 transactions per second.
- No Hardware Necessary
Unlike proof-of-work where miners need to possess or rent mining equipment, with proof-of-stake all you need are some tokens to stake.
Disadvantages of proof-of-stake
If it’s so fast, energy efficient and has no hardware requirements, what could be the negative side of proof-of-stake?
- More Centralized
Proof-of-work believers criticized proof-of-stake as a step back in the decentralized world of crypto since it concentrates huge amounts of cryptocurrency in large holders.
- Security Concerns
Concentrating huge amounts of tokens in a specific group can make it easier for them to take over the network with a majority attack.
- Relatively New
Proof-of-stake is still relatively new and we have yet to find out how secure it truly is on a larger scale over time.
Closing thoughts
Proof-of-work and Proof-of-stake are crucial to the blockchain ecosystem as they enable blockchains to remain secure, even without a central authority. If you’re considering investing in a cryptocurrency project, it’s essential to understand the strengths, weaknesses and unanswered questions of these two major systems. This produces valuable insight for the future and allows you to make informed decisions.
While proof-of-work has a reputation for consuming a lot of energy, it’s a battle tested system that has so far never failed. Only time will tell if the tendency for miners to form huge, centralized pools poses a real threat to the security of the system.
On the other hand, proof-of-stake offers an energy efficient security framework that also permits blockchains to grow over time. This is important if Web3 is to be adopted en masse. Yet the resilience of this relatively new system is still to be properly tested. This is why Ethereum 2.0 presents such an interesting case study into the development of Web3.
So go forth and explore what the blockchain ecosystem has to offer – just make sure you stay informed as you do so.
Frequently asked questions
What is Ethereum staking?
With Ethereum staking users pledge Ether as collateral to validate transactions on the Ethereum network and earn ETH rewards. You can also stake independently or through third parties like crypto wallets, exchanges, or staking pools.
Can I mine Bitcoin?
Anyone can join the Bitcoin mining process, but without access to powerful computers known as ASICs (application-specific integrated circuits), the likelihood of earning a Bitcoin reward is quite low.
What is a staking pool?
Staking pools enable crypto holders to earn passive income by contributing their funds to a collective pool that earns block validation rewards from a proof-of-stake blockchain. Small stakers typically can’t access the rewards available to validators on PoS chains like Ethereum.
What is a block reward?
A block reward is a financial incentive provided to cryptocurrency miners for validating blocks of transactions on a blockchain. This reward usually consists of a portion of transaction fees and newly minted cryptocurrency tokens generated by the blockchain network.
