Proof of Stake (PoS) and Proof of Work (PoW) are two types of consensus mechanism used by blockchains to validate every new block.
PoW is the oldest and most tested way of verifying transactions on the blockchain, used by the biggest cryptocurrency Bitcoin.
PoW requires a lot of computational resources to solve complex mathematical problems.
PoS is a competitive validation method that first emerged in 2012, which is favored by many new blockchains because it requires much less energy than PoW.
Ethereum, the second biggest blockchain, is set to transition from PoW to PoS on or around 15 September 2022, which is expected to reduce its energy consumption by 99.95%.
However, since PoW is a much older and more tested mechanism, it is considered more secure than PoS.
In this blog, we provide a full comparison between Proof of Stake and Proof of Work.
The news of the fast-approaching Ethereum Merge has once again brought attention to the two most widely used consensus mechanisms in the world of blockchain: Proof of Stake vs Proof of Work (PoS vs PoW).
The Ethereum Merge - easily the most eagerly anticipated event in the crypto ecosystem this year - will see the world's second-biggest cryptocurrency transition from Proof of Work (PoW) to Proof of Stake (PoS).
Let's take a look at the key differences between these two consensus mechanisms, the pros and cons of each, and the reasons why the Ethereum blockchain is moving to a Proof of Stake (PoS) model.
What is a consensus mechanism?
A consensus mechanism is used by blockchains to verify transactions, add them to the blockchain and create new blocks or tokens.
This is essentially a protocol that verifies that a transaction that happens on the blockchain is legitimate without the help of a third party (in contrast to the traditional financial system).
What is Proof of Work (PoW)?
A Proof of Work network relies on a process called mining, whereby a group of miners utilize computational power in order to solve cryptographic puzzles.
Once this puzzle is solved, a miner on a Proof of Work network would share their results with other nodes on the blockchain for verification, before adding a new block to the chain. In exchange, the miner would receive a block reward.
PoW is the first and oldest type of consensus mechanism, its history dating back as far as the 1990s when it was used to control email spam.
At the time, computers would have to perform a small amount of "work" to send an email. This work would be trivial for those sending legitimate emails, but substantial for those looking to send out a mass communication, thereby helping to prevent spam emails.
Proof of Work blockchains
The most prominent Proof of Work blockchain is, of course, the Bitcoin network itself. The first and oldest blockchain network, Bitcoin has always utilized crypto mining to generate new blocks.
However, as new blockchains have come along and the cryptocurrency ecosystem has developed, other models have emerged - chief among them the Proof of Stake model.
There are several advantages to a Proof of Stake model which have attracted newer blockchains, in particular, the fact that this consensus mechanism doesn't require the same amounts of computing power as Proof of Work.
Several years ago, Ethereum announced its plans to transition the blockchain from a Proof of Work to a Proof of Stake mechanism. This long-awaited Merge is expected to take place on or around 15 September 2022.
What is Proof of Stake (PoS)?
A Proof of Stake system functions differently compared to Proof of Work. In this type of blockchain, network participants lock up their own coins or tokens - called staking - in order to validate transactions.
The Ethereum 2.0 PoS mechanism requires validators to stake 32 ETH, which is both the minimum and the maximum amount required to become a validator, meaning there is no advantage to staking more than 32 ETH.
The participants chosen by the algorithm to validate transactions are called validator nodes. Once a node is chosen as the validator, their role is to verify the validity of a transaction in the block and propose the block to the other validators for further validation, with multiple nodes validating transactions on a PoS blockchain.
Because this process does not require the vast amounts of computing power that is needed for Proof of Work, it is far more energy efficient.
Proof of Stake blockchains
Peercoin (PPC) was the first to implement a Proof of Stake network back in 2012. Focused on sustainability, the Peercoin network aimed to create a cryptocurrency network with lower energy consumption than that of Bitcoin, which led to the development of the Proof of Stake mechanism.
Today, there are a growing number of blockchains utilizing the Proof of Stake (PoS) mechanism. Many of the newer blockchains are built using this method. Some of the biggest and most well-known PoS blockchains include:
BNB
Cardano
Polkadot
Avalanche
Cosmos
Biggest proof of stake blockchains, Source: CryptoSlate, 2 Sept 2022
Proof of Work vs Proof of Stake
While it may seem at first glance that a Proof of Stake mechanism is far superior to Proof of Work due to its lower energy consumption, there are several factors worth considering when comparing these two methods. Let's take a look at the pros and cons of Proof of Work vs Proof of Stake.
Comparison of Proof of Stake vs Proof of Work consensus mechanisms
Comparison of proof of stake vs proof of work consensus mechanisms
Pros of Proof of Work
Proof of Work blockchains have been around for a long time, so they have been tried and tested with years of experience. This makes them naturally more secure (though there are always some risks involved with cryptocurrency transactions).
An attack on a Proof of Work blockchain like Bitcoin would require so much computational power, it would most likely be too difficult to implement and too expensive to carry out.
Decentralization is supported by the fact that miners are forced to distribute internationally due to the high amounts of energy their operations consume, as evidenced by Bitcoin miners finding new locations around the globe to set up their operations. There has even been evidence of miners using surplus energy from renewable sources that cannot be used otherwise to power mining operations.
Cons of Proof of Work
The biggest problem with Proof of Work is the fact that it is energy intensive. Given the importance of climate change mitigation and the move to net zero to global political and economic agendas, this is widely seen as a negative aspect of blockchain.
There is an argument that it is difficult for individual miners to upgrade their software to compete effectively in cryptocurrency mining, meaning there is a danger that PoW blockchains will eventually become more centralized, with mining operations concentrated in the hands of a central authority in the shape of big corporations.
Pros of Proof of Stake
The biggest advantage of the Proof of Stake model is that it requires less energy to process transactions and validate blocks. This is naturally a big plus in terms of climate change mitigation.
There is no need for PoS validators to continuously upgrade their hardware since there is no need for massive amounts of computing power to validate blocks.
PoS blockchains can be far more efficient than PoW ones, as the time it takes to choose a validator is much faster.
There are lower barriers to entry for PoS blockchains since there is no need for expensive equipment, warehousing, or energy contracts. All that is needed for a validator to participate is the level of assets that the blockchain requires them to stake to become a validator.
Cons of Proof of Stake
The Proof of Stake mechanism is not as extensively tried and tested as the PoW model, so it could be exposed to security breaches and black swan events.
Rogue validators could choose to validate the wrong transactions, though many protocols have introduced incentives to stop this from happening. For example, rogue Ethereum validators will be subject to slashing, where some or all of their staked ETH will be slashed (removed) for proposing or confirming a fraudulent block.
Some PoS protocols require validators to stake a significant initial sum. For example, those wishing to participate in the Ethereum 2.0 staking system must stake a minimum of 32 ETH, which is roughly $50,000 at the time of writing (2 September 2022).
Why is Ethereum transitioning to a Proof of Stake consensus mechanism?
Ethereum is set to transition to the PoS mechanism around 15 September 2022. This long-awaited Merge is set to reduce the energy consumption of the entire network by as much as 99.95%.
This will make the world's second-largest blockchain more environmentally friendly and will potentially attract skeptics who have shied away from Ether for environmental reasons.
The Merge may also result in the ETH token becoming deflationary over time since it is expected to reduce issuance. For details of how this will work, head to our detailed blog on the Ethereum Merge.
In addition, as mentioned above, PoS does not require elite hardware in the same way as PoW does, which will reduce costs for running the network, as well as barriers to entry for becoming a validator.
Lastly, while the Merge itself will not lead to reduced fees or better scaling for the Ethereum blockchain as a whole, it opens the doors for future major updates, including the Surge, which is set to improve Ethereum's scalability and capacity.
Other consensus mechanisms
PoS and PoW are not the only ways to validate transactions that exist in the world of digital assets. There are a number of other algorithms used to confirm transactions and create valid blocks.
These include Delegated Proof of Stake (DPoS), which is very similar to PoS, but is based on a voting system that consists of voters and delegates. The voters stake tokens, while delegates are elected by voters to validate transactions.
Another algorithm used for the creation of new valid blocks is called Proof of Authority (PoA). This tends to be used more for private blockchain networks and relies on a mechanism where validators stake their own identity and reputation instead of coins or tokens.
Recently, a mechanism called Proof of History (PoH) has emerged, which makes it possible to attach a universal timestamp to validating transactions. This mechanism is used by the Solana network, for example. As the cryptocurrency ecosystem develops, new mechanisms continue to emerge.
Key takeaways
While there is constant innovation in the cryptocurrency industry, Proof of Work and Proof of Stake remain the two most widely used mechanisms. Understanding how they function is extremely important to gain insight into how the blockchain functions.
While the PoS mechanism is far more energy efficient than PoW, it's important to remember there are other questions to consider, including how safe a blockchain is. Being the oldest and most extensively tested validation mechanism, PoW is considered more secure.
Those blockchains that can achieve a high level of security combined with energy efficiency will find themselves in a winning position as the cryptocurrency ecosystem develops and matures.
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DISCLAIMER: The content of this article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.
