PoW VS PoS: What’s the difference?
Most of the cryptocurrencies that exist today are decentralized and they need some kind of algorithm to solve the trust problem, since in any blockchain the user sends money from one place to another, and he needs to have a developed system that provides trust between participants. Since there is no “centralized” authority to confirm transfers, we are forced to rely on complex algorithms to do so.
Proof of Work (PoW) and Proof of Stake (PoS) are two of the most popular cryptocurrency mechanisms. They offer proof of work that differs in structure. In this article, we want to explain what each of these mechanisms are, talk about their differences and the appropriateness of their use in the crypto industry.
Proof-of-Work (PoW) is an algorithm for protecting distributed systems from abuse, the essence of which boils down to two main points: the need to perform a certain rather complex and lengthy task and the ability to quickly and easily check the result.
To understand how PoW works, you need to understand what mining is.
Mining — is complex computer calculations that must be carried out in order to create a new block and add it to the blockchain.
In particular, how new blocks appear in the chain: the machine must solve the problem that the blockchain puts before it in order to be able to create the next block. Finding solutions is a complex process that requires significant computing power. The proof of work is a unique value (hash). As soon as the miner finds it, it sends the hash to other computers on the network for verification. Other participants can verify the hash against the task, but not use it to create a block. The hash key belongs to the miner who created it. Once a computer finds a solution, it sends a message to other computers in the community for verification. The solution is easy to check because other computers are given the answer. In addition, each hash carries the information of the previous blocks of the network. This forms a confirmation that all actions were performed within the same blockchain. For adding a verified block to the blockchain, the miner receives a reward in the form of cryptocurrency.
The key feature of the process described above is asymmetry: the problem must be difficult for the miner (every miner in the network tries to find the solution to the problem first, but it takes many attempts to successfully solve it, since it can only be found by actual enumeration), but simple enough for networks in general.
It is no exaggeration to say that Proof of Work still holds the status of the consensus algorithm most commonly used by popular cryptocurrency networks (like Bitcoin), but like any other mechanism, it has some drawbacks, such as:
- high energy consumption of mining equipment, which is very bad for nature;
- scalability (in the bitcoin blockchain, the average time it takes to complete one block is 10 minutes. And the bitcoin blockchain can only allow seven transactions per second. This means that during the busiest times, the cost of sending bitcoins is huge);
- mining requires serious computing equipment, which costs more than the average person can afford (this is very much contrary to the idea of decentralization, creates the risk of capture by a person who controls more than 51% of the computing power of the entire mining ecosystem).
Proof-of-Stake (PoS) works differently. Instead of solving a cryptographic problem, transactions are validated by “freezing” a certain number of miners’ coins as collateral. The coins are frozen until an “agreement” on the validity of transactions is reached. Once consensus is reached on the network, transactions are added to the blockchain, and the coins are kept frozen for some more time in order to protect against an attack on the network and avoid “double spending”. When the coins are unfrozen, miners get their coins back plus a small fee for recording transactions on the blockchain.
The idea of proof-of-stake is to solve the problem of proof-of-work associated with high energy consumption. Instead of the computing power of the participants, the amount of cryptocurrency in their account matters, and the creator of the new block is selected by the system in advance based on its state. So, instead of using a large amount of electricity to solve the PoW problem, the PoS participant has a limited percentage of possible transaction verifications. The limit corresponds to the amount of cryptocurrency in the account of the participant.
Although the PoS scheme looks quite attractive due to the small requirements for computing resources, and also because there is no question of “wasted” capacities, it also has its drawbacks:
- PoS provides additional motivation to accumulate funds in one hand, which can negatively affect the decentralization of the network (a person with 51% of all tokens in circulation can gain control over the network and its participants);
- the Nothing-at-Stake problem (an attacker can try to fork the blockchain, i.e. create a longer alternative chain by spending “non-existent” resources. Through a fork, an attacker can reject certain transactions and carry out a “double spending” attack);
- Proof-of-Stake model gives large owners additional votes in determining the further development of the network (this makes the cryptocurrency too centralized).
Both methods have their pros and cons. The Proof of Work system is certainly older and more fundamental, but eventually some of the biggest mined currencies (such as Bitcoin) will reach their token limit. At this point, they will have to switch to Proof-of-Stake. Many experts are unanimous that PoS is the way forward when it comes to consensus algorithms as it greatly reduces power consumption and does not require as much processing power. Therefore, it is possible that in the future we will observe a gradual transition of all cryptocurrencies to a non-mining model.