Some of the largest cryptocurrencies – Bitcoin, Ethereum, Bitcoin Cash, and Litecoin – use an approach known as Proof of Work to reach a consensus on which transactions are valid and added to the blockchain.
But there is another approach called Proof of Stake that promises to be much faster and uses less energy. Proof of Stake and Proof of Work are similar – they’re both mechanisms through which a distributed network of participants can agree on which new block of transactions is added to a cryptocurrency’s digital ledger (blockchain).
So, how exactly do they differ from one another? What are the key differences between Proof of Work and Proof of Stake? Keep on reading to find out.
In Proof of Stake systems, the computers (nodes) on the network are selected based on how much cryptocurrency they already have. In a Proof of Work network such as Bitcoin, all the computers on the network are competing to be the first to solve the problem and ‘prove their work.’ When that happens, they get to add the latest batch of transactions to the blockchain and earn some Bitcoin in exchange.
The main strength of Proof of Work is it requires an increasingly large investment in energy. This is how it makes it exponentially more difficult for a would-be bad actor to verify invalid blocks and double-spend cryptocurrency.
The consumption of energy has become a controversial topic. A single Bitcoin transaction consumes 1,173 kilowatt-hours of electricity. That’s the volume of energy that could power a typical American home for six weeks!
Proof of Work is computationally intensive, and this is, in fact, one of the reasons that many are concerned about the environmental impact of the Bitcoin network.
In addition to the electricity required, the ever-increasing amount of computing power needed to break a cryptographic problem on a Proof of Work blockchain is creating a growing e-waste problem as participants set aside outdated systems and replace them with more advanced ones.
On the other hand, since it’s based on open competition between miners, Proof of Work can be interpreted as more democratic and decentralized than Proof of Stake. The latter, by contrast, may favor large holders of cryptocurrency who are often early adopters and ensure that the corresponding blockchain is developed in a certain way.
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A Proof of Stake process (also called staking) works a bit like voting – though, with most Proof of Stake cryptocurrencies, the process doesn’t involve “one person, one vote.” Instead, participants known as validators stake a certain amount of crypto behind the block they want to be added to the chain, with different blockchains setting different limits for this amount.
Validation is important because it ensures that transactions happen fairly and agreeably, preventing the creation of fraudulent transactions.
Proof of Stake was created as a response to the high costs associated with Proof of Work protocols. Since Proof of Stake can be less energy-intensive and scale better than Proof of Work, it promises to be more efficient without requiring any complex equations to be solved.
However, in certain cryptocurrencies based on Proof of Stake, there isn’t really any limit on how much crypto a single validator could stake. This means that the system could be more centralized than some currencies based on Proof of Work.
While its environmental benefits are more impressive because it uses less energy, Proof of Stake hasn’t really been proven on the scale that Proof of Work platforms have.
The only blockchains to date that have achieved what can be called a level of mainstream adoption are Proof of Work blockchains. Proof of Work is the only consensus algorithm that has had its security tested at a high scale. It safely stored over $1 trillion in value in the case of Bitcoin.
While there are questions as to whether Proof of Stake can still prove itself, it has the advantage of incorporating measures to ensure that validators behave well and approve only valid blocks.
A key difference between the two consensus mechanisms is this: there is an economic incentive for nodes to participate well in Proof of Stake. If they ‘validate‘ bad transactions or blocks, they face something called ‘slashing‘ – which means they are penalized.
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Many believe that Proof of Stake is a much better model than Proof of Work because it decentralizes the block reward. Proof of Work blockchains give people who purchase powerful hardware devices a greater chance of winning the mining reward.
This has resulted in the centralization of blockchain networks controlled by the majority of hash power, leading organizations to buy thousands of devices (known as ASICs) that generate the highest mining power. This type of operation is known as a ‘mining pool,’ and it allows people to ‘pool‘ their resources together to give them the greatest chance of solving the cryptographic sum first.
Consequently, today just four mining pools control more than 50% of the total Bitcoin mining power (Foundry USA, Antpool, F2Pool, and Poolin).
The Proof of Stake model prevents groups of users from joining forces to dominate the network in order to make a profit. Instead, participants earn rewards based on their investment in cryptocurrency.
Another benefit of the Proof of Stake model is its lower electricity consumption compared with Proof of Work blockchains such as Bitcoin. A study from 2017 found that the total amount of electricity required to keep the Bitcoin network functional is more than the amount used by more than 159 individual countries! And that was 5 years ago; you can only imagine how much this demand has grown since then.
Another disadvantage of Proof of Work is the possibility of a 51% attack. If a group or person gains more than 50% of the total mining power, they are able to make changes to a particular block. If this entity were a criminal, they could alter the block for their gain.
A recent example of a 51% attack happened against the Verge blockchain that allowed the hacker to walk away with 35 million XVG coins. At the time of the attack, this amounted to a real-world value of $1.75 million!
When using a Proof of Stake consensus mechanism, it performing a 51% attack simply doesn’t make sense from the financial perspective. For this to work, the bad actor would need to stake at least 51% of the total amount of cryptocurrency in circulation. The only way they could do this is by purchasing the coins on the open market.
To verify transactions without using a central authority, cryptocurrencies use two different mechanisms today: Proof of Work and Proof of Stake. Proof of Work requires participants to generate new blocks by solving a cryptographic puzzle faster than other participants. On the other hand, Proof of Stake requires users to place crypto in a sort of virtual escrow in order to generate new blocks.
Both technologies come with various pros and cons, and Proof of Stake still needs to be proven to work on a large scale. We look forward to seeing advancements in this space as Ethereum moves to Proof of Stake and shows whether this consensus mechanism has the potential for changing the future of crypto.
