Blockchain networks employ Proof of Stake (PoS) and Proof of Work (PoW) as two consensus procedures to reach consensus and confirm transactions. Although they have comparable ends in mind, they are fundamentally different and have unique traits, benefits, and drawbacks.
(PoW) Proof of Work:
1. Characteristics:
- To validate and add blocks to the blockchain, PoW uses computer power to solve challenging mathematical puzzles.
- The first miner to find the answer wins newly created bitcoin. Miners compete with one another to find the answer.
- The puzzle’s level of complexity is changed to keep the block generation time coconstant
- PoW is used by Bitcoin, the first and best-known cryptocurrency.
2. Advantages:
- Due to its computing requirements, PoW is regarded as being extremely secure. To modify the blockchain, an attacker would need to possess the vast majority of the network’s computing power.
- Decentralization is encouraged by PoW since anyone with access to computing power can participate in mining.
- Proven idea: PoW has been used to power Bitcoin and other cryptocurrencies with success, giving them a history of stability and security.
3. Disadvantages:
- PoW uses a lot of energy since it takes a lot of computational power. This has caused others to worry about how PoW-based cryptocurrencies would affect the environment.
- Mining power concentration: Over time, PoW has resulted in the concentration of mining power in the hands of a select few sizable mining pools, diminishing the network’s overall decentralization.
- Scalability: PoW may experience scalability problems as network capacity grows, which could result in slower transaction processing times.
Proof of Stake (PoS):
1. Characteristics:
- The ownership stake (coins) that each participant has determines who will create the following block in a PoS system. A participant has a greater chance of getting chosen to validate the following block the more coins they possess.
- Deterministic selection of validators eliminates the need for computationally demanding calculations.
- The practice of…
As we said in the introduction, the community hopes to achieve several improvements from Proof of Stake. Here, we have a look at several advantages compared to proof of work (PoW).
Energy efficiency: Block validators don’t need to solve an energy-consuming puzzle. This would save electrical energy and is considered more eco-friendly.
Decentralization: Especially for public blockchains, decentralization is an important feature. Here, we focus mainly on the concentration of miners or block producers. Compared to PoW, the hardware requirements are lower and more people can participate in the consensus process. Depending on the concrete implementation´, everybody who holds this cryptocurrency can participate. But in reality, a certain minimum amount, as well as a stable internet connection are required.
Security: PoS is said to have some security advantages of PoW. The cost for an attacker can, in some circumstances, be higher. It is argued that gaining 51 % of the available coins is harder than gaining 51 % of the hashing power. Besides that having 51 % of the stake means potentially losing this amount.
Scaleability: Proof of stake itself doesn’t improve scalability. Network latency and block size are still limiting factors. But it allows other scaling techniques like sharding without reducing the security. In contrast, in PoW systems, sharding is possible too, but it would reduce each shard’s security (51 % attack resistance).
Complexity: To prevent potential hazards like the nothing at stake problem or long-range attacks, additional rules are necessary. Besides, the block validator selection is more complex and must be protected against denial of service attacks or hold-ups. This increases the complexity of the system.
Centralization: Centralization has already been discussed in the advantages. But it can also be seen from a different angle and turn out as a disadvantage. If a block validator holds x % of all staked coins, he also received x % of all newly created coins and transaction fees as a reward for his validating work.
And since the electricity and hardware costs are very low, there is no need to spend those coins. As a result, the block validator would accumulate those x % over time and increase its wealth. This would lead to an increasing influence in the staking pool, which could hold on forever. It would also prevent the distribution of the newly created coins among other users.
Security: In some circumstances, the cost of a 51 % attack can be lower than in PoW. This is true if the attacker can convince the community that his attack will be successful. He could buy the necessary coins for a low price if users try to sell their potentially worthless coins.
Initial distribution: In PoS, coins are necessary to become a validator. But usually, coins are distributed as block rewards to the validators. Without coins, nobody can become a validator and earn coins to stake. A solution to this problem is a pre-mining of coins and distributing them to some addresses given in the genesis block. Pre-mining, however, is discussed controversially since it can lead to centralization. Another approach could be to start with a PoW, and if the coin distribution is large enough, switch to PoS.