If you are here you probably know a thing or two about Blockchain and that its security relies on cryptography. Creating a decentralized system where everyone agrees with the state of the network has a big challenge to solve: Finding a way for the members of the Blockchain to reach a consensus about it.
Overview of the mechanisms
The consensus-mechanism that most people know about is Proof of Work (PoW). Used by popular Blockchains like Bitcoin and Ethereum (As of today) it relies on the amount of work that has been put into solving a cryptographic problem to generate (mine) a new block and add it to the end of the chain. The longer the chain, the more secure it is due to the amount of work put into it.
The other one we are gonna look into is called Proof of Stake (PoS), in this one instead of “Miners” we have “Validators”, who must stake an amount of cryptocurrency or crypto tokens to have a chance to be chosen as a validator for the next set of transactions. The probability of being chosen gets higher the bigger your stake.
PoW vs PoS fundamentals
Given the nature of the cryptographics problems for PoW, the only way to solve them is by trial and error. Moreover, if you want to be the miner of a block you have to compete against all the others to be the first one and get the desired reward. It is in the miner’s best interest to get big, expensive, power-hungry computers.
On the other hand, we have PoS where you are chosen as an already trusted validator thus securing a reward provided you correctly validated the block. The computing requirements are much lower and the entry barrier has been shifted from elite hardware investment to the staking.
Differences between Proof of Work and Proof of Stake
Although both are consensus mechanisms that ensure the security of the blockchain network, there are certain differences between the two (PoW & PoS):
- The main difference is, of course, how PoW and PoS determine which participant validates new transactions.
- As for who can validate or mine blocks, while in the case of PoW the higher the computational power, the higher the probability of mining a block, in PoS, the more coins you have in staking, the more likely you are to validate a new block.
- There are also differences in how a block is validated/mined. In PoW, miners compete to solve complex mathematical puzzles using their computational resources. While in PoS, usually, the algorithm determines the winner randomly, taking into account the amount of coins in staking.
- Another big contrast lies in the mining equipment needed in both consensus mechanisms. On the PoW side, professional mining hardware is recommended, such as ASIC, CPU and GPU. But in PoS, any computer or mobile device with internet connection is sufficient.
- A great detail to take into account as well, is how the rewards are distributed. In the case of PoW, the first person to mine the block receives a reward from the block; and in PoS, validators can receive a portion of the transaction fees collected from the block they validated.
- Last but not least, we should mention how the network is protected in each mechanism: In PoW, the higher the hash, the more secure the network. However, in PoS, the staking blocks the cryptocurrencies on the blockchain to protect the network.
The environmental impact of Proof of Work
One of the drawbacks with a competitive system is that there only is one winner therefore the energy put into it by the other miners is wasted, making it even more inefficient. But how big is this power usage? Bitcoin, which is the largest one, consumes about 150 terawatt-hours of electricity annually, exceeding the entire country of Argentina, with a population of 47 million. Ethereum’s consumption is estimated to be around 112 terawatt-hours of electricity per year.
The real problem lies within the power source itself, the impact of a PoW Blockchain is the one done by the generation of the electricity. In 2021 more than 60% of the global energy production came from fossil fuels. We can only estimate that the same percentage applies here.
This has already put in question the scalability of this consensus-mechanism so much so that Ethereum is releasing ETH2.0 which uses Proof of Stake in the near future, which is predicted to reduce the power consumption by more than 99% percent , as it’s about 2000x more efficient.
Potential attacks and penalizations
Both mechanisms rely on the assumption that most miners or validators will act in good faith therefore they are vulnerable to a 51% percent attack. In case of the PoW, if a person of a group controls more than 50% of the mining power they could potentially alter blocks for their own benefit. On the other hand for a PoS blockchain the same type of attack would require having a stake bigger than the rest of the other validators combined.
The big deflector for attackers in both cases is the possible financial loss, the penalty for a PoS malicious validator is reflected on a “slash” of their stake with only one altered block. In the case of PoW the energy cost of keeping a parallel, longer chain which scales with the amount of competitors.