How Proof of Stake Differs From Proof of Work

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Privacy and security have always been a ground for debates in the crypto industry. Hence, the foundation of a consensus mechanism in the blockchain is important to sustain the network. Ultimately, these consensuses are used to achieve an agreement on a single data value among an array of distributed processes and cryptocurrencies. So, whenever there’s a system failure, a correcting mechanism is thereby correcting the errors. When comparing Proof of Stake vs Proof of Work side-by-side, the difference is pretty obvious.

Today we are all on the verge of seeing the Proof of Stake (PoS) consensus mechanism to revolutionize the existing Proof of Work (PoW). While both of these consensus mechanisms aim to regulate the legitimacy of blockchain’s decentralized public ledger, the PoS believed to be an upgrade. Mainly to circumvent security infiltration issues like a 51% attack. That means the PoS algorithm is more resistant to an attack, and it helps to regulate the issuance of new units of its supply more diligently. The upshot? All of it is happening without the aid of a central party.

So, to help you understand the differences between Proof of Stake and Proof of Work better, we’ll be highlighting the dissimilarities. That includes the mining mechanism, transaction verifications, safety, and more.

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What Is Proof of Stake?

The Proof of Stake is an upgraded consensus algorithm primarily aimed to solve problems the current Proof-of-Work is facing, including high electricity costs and security issues. Though both of these algorithms strive to solve the same problem, the process of reaching the goal is relatively different. 

The introduction of PoS is to eradicate the problems Bitcoin’s PoW system is facing. As compared to Bitcoin’s PoW consensus, the PoS aims to stray away from the dependency on computer power to form a well-defined sequence of blocks. So, instead of miners competing against each other to complete a transaction on the network, there won’t be any competition to cherry-pick a person to add blocks.

Ultimately, PoS replace miners with validators to lock up a stake within a crypto ecosystem. Hence, these blocks are referred to as minted rather than mined.

What Is DPoS?

Delegated Proof of Stake (DPoS) is a contemporary consensus mechanism to improve scalability without compromising the incentive structure built on the blockchain. Unlike the conventional PoS mechanism, DPoS allows users to earn rewards and rights for validating a transaction, putting blocks together, through coins staking.

So, if a user fails to verify a transaction, the block will be missed, and the reward is then accumulated for the next witness. In the end, the DPoS strives to boost the overall mechanism’s efficiency and build a more coherent ecosystem. 

How Does PoS Work?

The PoS algorithm is conceptualized based on the arbitrary election processes to select a node as a validator for the next block. Unlike PoW, there won’t be any mathematical puzzles to solve to validate a block in exchange for rewards. Hence, mitigating the energy-intensive mining process.

On the contrary, the PoS system rewards the validators through a transaction fee. So, a user who participates in the forging process by staking a certain amount of coins into the network may get a chance to be picked for forging the next block. For example, if one participant staked five coins while someone else staked 50 coins; naturally, the chosen next block validator is always those with a higher total value staked. In the end, the more you stake, the higher chances you’ll be selected to be the next validator. 

However, the PoS consensus is criticized for its favoritism towards the wealthy. The most affluent will likely be selected by the system, whereas the poor will be discriminated against. Of course, this methodology sparks a debate concerning the partiality led by an unjust system. Hence, the randomized block selection, a coin age selection, and fisherman system came into play to circumvent the flaws.

Here’s the breakdown of these unique integrations:

Randomized Block Selection

This methodology offers a sophisticated logic by combining the lowest hash value on a node with the largest stake size. The randomization helps regulate a healthy ecosystem within the PoS consensus and protect valuable block-forger that appends blockchain blocks.

Coin Age Selection

On the other hand, this selection method relies on the period of the cryptocurrency has been staked. This methodology aims to provide an impartial PoS consensus and prevent the domination of larger staked nodes on the blockchain. That means whenever a node forges a block, the coin age will reset to zero, and there will be a cool-down period to forge a block again. 

Here’s how you calculate the coin age cool-down time:

Coin Age = Number of Staked Days x Number of Staked Coins

For example, if you’ve staked only one coin for 20 days, the coin age is 20, and it’ll reset to zero until you can forge another block again.

Fisherman Regulators

The rules are different depending on each of the cryptocurrency using the Proof of Stake algorithm. Well, the fisherman approach is here to mitigate malicious activities against the validators. When a validator possessed a threat to the network, the validators could risk losing their funds. Besides, the validator can also be blacklisted from being a validator ever again.

However, if nodes decide to stop being a forger, they can withdraw all of the rewards and stakes. That means all of the blocks must be verified and confirm no engagement in any fraudulent activities.

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What Is Proof of Work?

This consensus mechanism was introduced by Satoshi Nakamoto alongside Bitcoin in a white paper back in 2008. As a fault-tolerance solution, PoW is used as a cryptocurrency protocol for generating new blocks while maintaining the network through the mining process. In exchange for rewards, miners need to maintain the network by solving intricate cryptographic problems. 

The implementation of PoW aims to decentralize transactions and to eradicate the possibility of double spend aka 51% attack. However, the occurrence remains inevitable. In fact, the attack has happened to Bitcoin Cash and Ethereum Classic multiple times. On top of that, the use of PoW is rather energy-consuming. To add on, the mining hardware for mining is relatively expensive to maintain the system. Hence, the scalability of this setup is questionable. 

How Does PoW Work?

Miners use the PoW protocol in the mining process. So, when someone send a Bitcoin from one to another, a block with a timestamp on the decentralized network will record the transaction. To validate the transaction, miners need to deploy computing power (hash rate) to solve complex mathematical puzzles. To uphold the consensus, the majority of nodes have to agree that the problems have been solved. 

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Proof of Stake vs. Proof of Work: The Differences

Today, blockchain technology is revered for being secure. But it doesn’t happen without the significant functions of the consensus mechanism. While both PoS and PoW are devised to tackle the blockchain hacks and frauds, they deviate from one another.

Here’s an overview of its differences: 

Mining Mechanism

The Proof of Stake system is more efficient when comparing it with the PoW mining system. That’s because PoS does not require mining while miners require a colossal of energy to mine a PoW based cryptocurrency like Bitcoin.

With PoS, the mining power is distributed proportionally to the coins a miner holds. It is thereby limiting the mining percentage of a transaction through the ownership of a miner’s stake. So, let’s say a miner staked 10% of Bitcoin, the maximum blocks can be mined is capped at 10%. 

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The Cambridge Bitcoin Electricity Consumption Index (2020)Energy Consumption

Bitcoin has always been the center of attention, including the energy it consumed. With Bitcoin’s PoW system using almost 0.21% of the world’s energy supply, Bitcoin mining is the least environmentally friendly digital asset. Besides, the competitive nature of Bitcoin mining means more computing power is required to sustain the ecosystem.

With the PoS system’s implementation, mining can be replaced with a minimal amount of energy to maintain the system. The upshot? The environment is restored, and the scalability is upheld via community involvement. 

Trustless and Decentralization

The risk of centralization is one of the biggest concerns with the Proof of Work consensus algorithm. Since the PoW mining system is much more reserved for the majorities, this system’s transparency is obscured for the community. When PoW relies only on the majority, it’s moving towards the idea of centralization by granting the possibility of a network or transaction manipulation. 

Proof of Stake, on the other hand, provides a fairer solution through the distribution of authority within the holders and stakers. That means the network control is proportional to how much a participant invests. For example, participant A in PoS invests in 20 coins, and he’ll receive the same amount of power.

However, the same participant invests in 20 coins more than participant B; he’ll be receiving more computation power. As a result, PoS is more transparent since the network is more rigid as compared to PoW.

Safety

Proof of work on Bitcoin may be resilient to a specific attack. But it is vulnerable to potential security risks, including a 51% attack and system instability due to forking.

When a fork happens on a blockchain, the ecosystem is divided. Let’s say a blockchain is forked; miners would need to direct their mining power to the old and newly forked blockchain. Of course, hard-fork means to bring goods rather than harm. Still, splitting the mining power reduces a miner’s crypto mining rate.

However, Proof of Stake is more resilient towards a 51% attack. That’s because it’s even more expensive to execute this malicious attack on the PoS. Though it’s not entirely impossible, as long as the attackers can bear the drastically increased crypto price and gather enough power in a short amount of time.

Reward Distribution

Both the PoW and PoS reward cryptocurrency to the participants who can propose a valid block. However, the PoS system’s reward is proportional to how much a participant stake as collateral to verify a transaction. Still, the size and how long the crypto has been staked play a role in determining who gets to verify a transaction first.

Proof of Stake vs. Proof of Work: The Benefits 

Both of these consensus mechanisms are essential for blockchain. Still, the benefits are different, especially since both of these mechanisms serve another purpose. 

The PoS mechanism is beneficial for the environment as it is less reliant on electricity. Higher collateral requirements and heavier punishments towards a faulty block on PoS also result in a healthier ecosystem, and it’s more sustainable in the long-term. It also offers a fairer mining system with scalable transactions as compared with the PoW. Best of all? PoS steers away from the centralization idea by focusing on an individual’s coin ownership for control delegation.

Proof of Stake vs. Proof of Work: The Risks

Risks of PoS:

  • Complex: Complicated systems with collateral and the retribution mechanism increases the occurrence of errors. Inaccurate calculation of collateral may cause validators to lose all of the stakes.
  • Bias: It is more challenging for average investors to participate since it requires many stakes and time to gain substantial rewards.
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The average energy consumption of the Bitcoin network surpassed Switzerland and Czechia. Source: CBECI

Risks of PoW:

  • Double Spend: This happens when an entity reuses the same funds multiple times. It happens when an entity control enough computation power to tamper with the blockchain. An entity can reverse a transaction to create a separate blockchain for illegal crypto double-spending.
  • High Electricity Consumption: Bitcoin mining uses more energy than the whole of Switzerland.

Which Is A Safer Consensus Mechanism?

Many cryptos are still using the Proof of Work consensus, including the titan Bitcoin and Ethereum. However, the Proof of Stake algorithm appears to be safer. That is because it’ll be even more costly to attack a transaction on PoS when comparing to PoW.

In fact, Ethereum 2.0 will be ready to launch with the Proof of Stake model wherein miners are referred to as block validators. Hence, providing a safe blockchain ecosystem for miners and investors. 

Which Crypto Is Adopting Proof of Stake?

The majority of cryptocurrencies today are still using the Proof of Work algorithm, including Bitcoin. However, many cryptocurrencies are transitioning to the Proof of Stake algorithm. That gives different economic benefits to HODLers to run a master node or staking coins in exchange for rewards. Here are some of the cryptocurrencies that are using the PoS mechanism:

NEO: The first Chinese open-source blockchain project allows more than one crypto-token to stake in NEO wallet. Participants earn rewards in the form of NeoGAS with approximately a 2% to 3% annual return rate.

Stratis (STRAT): Staking STRAT in a Stratis wallet can earn you rewards with around 0.5% to 1% annual return rate. 

Nxt (NXT): It is a crypto coin that uses minimal hardware equipment to earn stake rewards. It doesn’t depend on the coin age concept used by other PoS crypto and is much resilient to stake attacks. The annual return rate is around 1.26%.

Tezos (XTZ): Engaging the stakeholders in the network changes through a voting system. Tezos strives to fix governance issues, and stakeholders get staking rewards to keep the system running. The reward returns are around 6% annually. 

Tron (TRX): Tron took off with its decentralized applications and the purchase of BitTorrent and Steemit. Earning passive income from TRX through staking will keep you with around 4% yearly interest. 

Cosmos (ATOM): The staking rewards are the highest, with approximately 8% annual return with Cosmos. Cosmos grew exponentially with over 100 projects worldwide, and even Binance uses their technology to build Binance Chain. 

What Is The Future of Blockchain’s Consensus? 

Though the Proof of Work has been a standard consensus algorithm for many cryptocurrency networks, the PoS consensus is here to revolutionize the existing protocol. The circulation of hybrid PoS and PoW may seem to be an excellent upgrade to compliment each other for their flaws. The adoption of the hybrid mechanism remains unknown. As technology continues to evolve, the blockchain would too. 

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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