Crypto Guide: What's the Difference Between Proof-of-Work and Proof-of-Stake?
A defining characteristic of Bitcoin and leading altcoins is that they're centralized. In the blockchain technology, decentralization refers to the transfer of control, decision-making, and authority from a centralized entities (like a single individual or organization) to a larger distributed network.
The idea behind a decentralized network is to create a trustless system where the level of trust among participants is low. In short, in this type of network, the resources and decision-making are spread out, preventing the risk of a 'small number of bad players' taking control of the network.
However, Bitcoin and crypto's primary characteristic poses a challenge: how can we trust a network without an entity with full control over verifying transactions?
The developers behind Bitcoin overcome this challenge by using the proof of work approach, and it's now the same process used by other leading altcoins like Bitcoin Cash and Litecoin. Other crypto projects tried a different approach in policing transactions, and they rely on the proof of stake, which you'll find in Ethereum, Avalanche, Cardano, and Solana projects. The Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the two dominant approaches used by the decentralized blockchain systems to reach a consensus in verifying and determining the accuracy of transactions.
Proof-of-Work and Bitcoin
Bitcoin, the world's most valuable cryptocurrency, works using the PoW. This approach integrates 'competition' to see which new block completes the most computational work.
In a proof-of-work network, computers or nodes compete to solve the problem and provide proof of work. In completing the work, they add a transaction to the blockchain and earn a bitcoin in exchange. You may have probably heard or read about miners, and they're exactly the individuals or entities behind this process.
The miners' job is to add a new batch of data block or valid transaction into the Bitcoin blockchain, and they can only do that by performing sufficient work. To complete these transactions, miners must rely on computing power to run the cryptographic hash function called the SHA-256.
The primary advantage of Bitcoin's proof-of-work is that it requires a large energy investment. While this may sound counter-intuitive, it works for the blockchain since it makes it more difficult for some 'bad players' to verify invalid blocks and double-spend crypto.
Because of the high energy requirement, would-be miners will stick with the rules instead. So, expending more energy on verifying transactions and adding a new data block makes the system more reliable.
While the concept behind the proof-of-work seems impressive, its use has become controversial.
Several articles and research point to the environmental impact of crypto's proof-0f-work mechanism. Experts say that crypto and this mechanism require a lot of energy, equipment, and the internet to work. As such, it creates an environmental problem, which according to some studies, it uses as much energy as small countries to run the blockchain. The more computers we need to keep the network running and resilient, the more energy is consumed.
In addition to the electrical power requirement, this mechanism also produces electronic waste as minders dispose old and outdated systems with new ones that are more powerful (and power hungry).
How does PoW work for BTC and the blockchain
Although the energy consumption of this mechanism has been controversial, many still see its value in the long run. As mentioned, the high cost of electricity prevents some bad players from exploiting the system and double-spending BTC. Also, many experts say that the proof-of-work mechanism promotes friendly competition among miners, which is far more decentralized and democratic.
Aside from Bitcoin, a few other cryptocurrencies rely on the PoW as their consensus mechanism. All forked versions of Bitcoin, including Bitcoin SV and Bitcoin Cash, also work using the mechanism. Litecoin, Dogecoin, and Monero also use the PoW.
Proof-of-Stake and Ethereum
At the heart of this mechanism is the process called 'staking.'
Think of staking as a form of voting, but not in our familiar democratic setting of 'one person one vote' rule. Instead, projects that use the PoS rely on 'validators' who stake a certain amount of digital coin behind the block they want to add to the chain, and different blockchains set varying limits for the amount. This amount of staked cryptos is often locked for a certain period of time.
Under this mechanism, stakers are randomly selected to propose newly validated blocks, hence called validators. In a way, PoW is more democratic than PoS since you can only participate in the latter if you hold a financial stake.
The most important crypto that runs on the PoS mechanism is Ethereum. Ethereum is actually 'late' in adopting this mechanism since it formally announced the shift last September 2022. Under Ethereum's mechanism, full nodes acting as validators are randomly selected every 12 seconds, and they're tasked to create new blocks and validate transactions. To become a validator, the person must stake 32 ETH, but staking more doesn't increase one's chances of becoming a validator.
Another option is to contribute less than this amount to the staking pool. A validator runs this staking pool, and when you contribute here, you're giving the validator the authority to verify transactions, and your reward is proportionate to your contribution.
How does PoS work for Ethereum and the blockchain
According to its developers and supporters, the proof-of-stake mechanism is 'greener' than proof-of-work. Bitcoin mining which works using the PoW is a computationally intensive process to create new coins, and PoS is the perfect alternative.
According to the team behind ETH, the PoS is more cost-effective and friendly to the environment. Staking promotes wider participation in securing the network since the validator node can run on a normal laptop. The PoS was developed to address the high computational costs of the PoW protocol. There is greater scalability and throughput to arrive at a consensus since it's faster to approve transactions and blocks without the need to solve complex problems.
However, there are also a few complaints against Ethereum's proof-of-stake mechanism. As mentioned earlier, you'll need to stake ETH which serves as the collateral. Your ETH is your financial commitment to discourage dishonesty, like double-spending coins. Of course, you need to have ETH for you to participate in the staking process.
Also, in terms of scale and reliability, PoS hasn't been tested or proven on a scale similar to Bitcoin's PoW. At least with the PoW protocol, it has been tested at a large scale, with Bitcoin as the best example.
Let's recap the main difference between PoW and PoS
Proof-of-work and proof-of-stake are two mechanisms used for achievening consensus and adding new data to the blockchain. Each approach verifies the transactions without relying on the role of a single authority. In the PoW, there is consensus by requiring participants like miners to spend computational power to verify a transaction and come up with a valid block.
Meanwhile, the PoS gets consensus by requiring the participants to stake coins behind a new block they want to add to the blockchain. In today's market, Bitcoin is the largest implementation on the PoW while Ethereum leads the group that relies on the PoS to achieve consensus.
