Secrecy and security have always been fundamental issues of debate in the crypto industry. That’s why the basic consensus mechanism in the blockchain system is necessary, supporting the network to work effectively. This consensus is generally used to reach an agreement on a data value among a series of distributed processes and within the crypto world. So whenever a system fails, repair mechanisms are in place to fix it. Their differences are obvious when comparing Proof of Stake and Proof of Work side by side.
Today, we all witness how the Proof of Stake (PoS) mechanism moves and revolutionizes its predecessor, namely Proof of Work (PoW). So, to help you understand the difference between PoS and PoW, we will focus on the essential factors. This includes mining mechanisms, transaction verification, security, and others.
What is Proof of Stake?
Proof of Stake is a consensus algorithm upgraded primarily to solve problems facing the current Proof-of-Work consensus, including high electricity costs and security issues. Even though these two algorithms attempt to solve the same problem, the process of achieving their goal is very different.
Introducing PoS aims to solve the challenges facing the Bitcoin PoW system. Compared to Bitcoin’s PoW consensus, PoS seeksto move away from the system’s dependence on considerable computer power in forming well-defined sequences of blocks. So, instead of miners competing with each other to complete transactions on the network, PoS keeps the system competition-free when choosing someone to add a block to. Ultimately, PoS replaces miners with validators to lock or stake their crypto assets in the crypto ecosystem. Therefore, blocks in this mechanism are referred to as “printed” rather than “mined”.
What is DPoS?
Delegated Proof of Stake (DPoS) is a contemporary consensus mechanism developed to increase scalability without compromising the incentive structure built on top of the blockchain system. In contrast to conventional PoS mechanisms, DPoS allows users to earn rewards and rights to validate transactions, and pool blocks, through staking coins.
So, if a user fails to verify a transaction, the block is skipped, and the bounty accumulated for the next validator. Ultimately, DPoS seeks to increase the overall efficiency of the mechanism and build a more coherent ecosystem.
How PoS Works?
The PoS algorithm is conceptualized based on an arbitrary selection process to choose a node as the validator for the next block. Unlike PoW, with this mechanism, there will be no math puzzles to be solved to validate blocks in exchange for prizes. Therefore, this can mitigate energy-intensive mining processes.
In contrast, PoS systems reward validators through transaction fees. So, users who participate in the minting process by staking some coins into the network can get a chance to be selected to print the next block. For example, one participant stakes five coins while another person stakes 50 coins. Of course, the next block validator chosen is always the one with the higher total staked value. Ultimately, the more coins staked, the higher your chances of being selected as the next validator.
However, the PoS consensus has been heavily criticized for favoring the rich, or those with more coins to stake. The system will likely chose the wealthier while discriminating against the poor. Naturally, this methodology sparked a debate about partisanship led by unjust systems. Therefore, random block selection, coin age selection, and the fisherman system play a role in avoiding these drawbacks.
Here are the details of these unique integrations:
- Random block selection: This methodology offers sophisticated logic by combining the lowest hash value of a node with the largest stake size. Scrambling helps set up a healthy ecosystem in PoS consensus and protects valuable block printers that add to blockchain blocks.
- Coin age selection: On the other hand, this selection method depends on the staking period of the cryptocurrency. This methodology aims to provide an impartial PoS consensus and prevent greater dominance of staked nodes in the blockchain. That means every time a node prints a block, the coin’s age will be reset to zero, and there will be a “cool down” period to print the block again.
Here’s how you calculate the coin’s age cooling time:
Coin Age = Number of Days staked x Number of Coins staked
For example, if you play with only one coin for 40 days, the age of the coin will be 40; after that, it will reset to zero until you can score another block again.
Fisherman Regulators : The rules differ depending on each cryptocurrency that uses the Proof of Stake algorithm. The fisherman’s approach is here to reduce malicious activity against validators. When a validator has a threat to the network, the validator can take the risk of losing their funds. In addition, validators can also be blacklisted and cannot become validators again. However, if a node decides to stop being a block printer, validators can withdraw all rewards and stakes. That means all blocks must be verified and ensure there is no involvement in any fraudulent activity.
What is Proof of Work?
This one-of-a-kind consensus mechanism was introduced by Satoshi Nakamoto alongside Bitcoin in the first crypto asset’s whitepaper in 2008. As a fault-tolerant solution, PoW is used as a cryptocurrency protocol to generate new blocks while sustaining the network through the mining process. To be rewarded with coins, miners must maintain the network by solving complex cryptographic problems.
PoW implementation aims to decentralize transactions and eliminate the possibility of double spending, which is 51% of cyber attacks. However, incidents remain inevitable in the course of PoW. In fact, this attack has happened to Bitcoin Cash and Ethereum Classic many times. In addition, using PoW is highly energy-consuming and mining hardware for maintaining the system is relatively expensive. Therefore, the scalability of this setup is questionable.
How PoW Works?
Crypto miners work by using the PoW protocol in the mining process. So, when someone sends Bitcoin from one to another, a time-stamped block on the decentralized network will record the transaction. To validate transactions, miners must use computing power (hash rate) to solve complex mathematical puzzles. To enforce consensus, a majority of nodes must agree that the problem has been resolved.
The Difference Between Proof of Stake and Proof of Work
Currently, blockchain technology is appreciated by many because of its security. But that didn’t happen without the significant functionality of the consensus mechanism. Although PoS and PoW are designed to tackle blockchain hacking and fraud, they differ. Following are some of the differences between these two mechanisms:
The Proof of Stake system is considered more efficient when compared to the PoW mining system. That’s because PoS does not require mining, while miners need enormous energy to mine PoW-based cryptocurrencies like Bitcoin. In other words, PoS makes blockchain systems more energy efficient. With PoS, mining power is distributed proportionally to the coins the miner owns. Thus it can limit the mining percentage of a transaction through the ownership of the miner’s stake. So, let’s say a miner is staking 10% of a PoS-based coin, the maximum block that can be mined is limited to 10%.
Bitcoin has always been the center of attention, including the issue of the energy it consumes. Additionally, the competitive nature of Bitcoin mining means that more computing power is required to maintain the ecosystem. With a PoS system, mining can use lower computational energy to maintain it.
PoW mechanisms may be resistant to various attacks. However, this mechanism remains vulnerable to potential security risks, including 51% of attacks and system instability due to forking. When forking occurs on the blockchain, the ecosystem becomes divided. With a forked blockchain, miners must direct their mining power to the old and new blockchains. Of course, that makes hard-forks more profitable than detrimental. Still, dividing the mining power reduces the miner’s crypto-mining rate.
Proof of Stake has a good defence against 51% of attacks although an attack is not impossible. That’s because controlling 51% of the coins on the network is very expensive. However, it’s not impossible, as long as the attacker can quickly gather sufficient strength and endure the drastically increasing crypto price.
Distribution of Rewards
Both the PoW and PoS systems award cryptocurrency to participants who can add blocks. The difference is that the PoS system rewards are adjusted to the amount of participant staking as collateral to verify existing transactions. Nonetheless, the size and how long the crypto has been staked plays a role in determining who will verify transactions first. Whereas in PoW, the reward amount is the same every time a new block is added. In the case of Bitcoin, each time a halving occurs, the reward amount is halved.
The Difference Between the Benefits of Proof of Stake and Proof of Work
Both of these consensus mechanisms are very important for the blockchain ecosystem. However, the benefits of the two differ considerably, mainly because the mechanisms have different objectives.
Proof of Stake Risk Compared to Proof of Work
- Complex: Complex systems with collateral and retribution mechanisms increase the occurrence of errors. Inaccurate collateral calculations can cause the validator to lose all his staked coins.
- Bias: It is more challenging for the average investor to participate as it takes many coins and much time to earn huge rewards.
- Double spending: This happens when an entity reuses the same funds more than once. It occurs when a party controls enough computing power to tamper with the blockchain. The party can reverse transactions to create a separate blockchain for illegal crypto double-spending.
- High Electricity Consumption: Bitcoin Mining uses a high amount of electrical energy.
What Is the Future of Blockchain Consensus?
Although Proof of Work has become the standard consensus algorithm for many cryptocurrency networks, Proof of Stake consensus is here to revolutionize existing protocols. Even so, the PoW mechanism in today’s Bitcoin blockchain continues to be monitored as safe from cyber-attacks, making its position irreplaceable. Hybrid PoS and PoW circulation is an improvement that would complement the other’s shortcomings, although using a hybrid mechanism is not common enough to adopt. Still, as technology advances, blockchain will continue to experience improvements.