Proof-of-Work vs Proof-of-Stake

Proof of Work (PoW) and Proof of Stake (PoS) are the two main consensus mechanisms used by cryptocurrency networks. Previously we addressed blockchain technology, its benefits, and how it works on the example of Proof-of-Work and Proof-of-Stake networks. Let’s describe these two consensus mechanisms and compare them in more detail now!

Proof of Work vs. Proof of Stake (simple explanation)

Cryptocurrency is decentralized and transactions need to be verified by computers to be added to the database and made visible on blockchain explorers. Proof of Work and Proof of Stake are the two commonly used algorithms for confirming the cryptocurrency operation did happen and is registered on a blockchain.

What’s the main difference between PoW and PoS?
The major difference between Proof of Work and Proof of Stake lies in the approach: how each algorithm authorizes and selects computers for adding crypto transactions to the block. When the first trusts miners to perform the task, the latter relies on staking.

Cryptocurrency Transaction Verification in Proof of Work vs. Proof of Stake blockchains Image by Cong Nguyen, Hoang Dinh Thai

How PoW works

The image of stereotypical Bitcoin miners with rooms full of computers is a familiar representation of how PoW operates. They need all this computing power to complete the process. Proof of Work requires miners to compete against each other to solve complex tasks and thereby ‘mine’ new blocks to the chain. The first to finish gets to validate the transaction and share it with the network. 

How PoS works

In Proof of Stake, instead of miners competing, token holders put their tokens in a pool, which gives them a chance to be randomly chosen to validate blocks and receive a portion of transaction fees as rewards. The validators get picked by the algorithm based on the amount of cryptocurrency staked and the minimum amount for staking is usually required. Some most popular examples of blockchains using the PoS consensus mechanism include Solana, Algorand, Cardano, and post-merge Ethereum. 

Proof of Work vs. Proof of Stake Energy Consumption

In terms of energy consumption, Proof of Work is significantly more intensive as it require <99s a huge amount of computing power in order to maintain a constant source of computing power to be able to compete. Since this source of power is often provided through electricity, it increases the cost of operating a network using PoW.

According to estimations, Bitcoin mining uses around 106 Terawatts hours (TWh) of energy per year, almost as much as the Netherlands alone. However, the amount of energy intensity of cryptocurrency mining is nowhere near that of gold mining, the data network industry, and even YouTube resource consumption.

Annual Energy Consumption in TWh per Industry, June 2022 / Source: Ethereum.org

In contrast, Proof of Stake is considered less carbon-intensive since it only requires users to hold a certain number of coins in order to verify the transactions and add them to the ledger.
Additionally, PoS does not require powerful and expensive hardware like mining, thus saving electricity costs associated.

PoW vs. PoS Decentralization

Both algorithms strive to create a secure and decentralized cryptocurrency blockchain. Proof of Work may have the advantage due to the large number of miners maintaining the security of the network, which leads to a higher level of decentralization.

Proof of Stake, in turn, relies on the crypto held by a handful of stakeholders, leading to a higher degree of centralization. Additionally, the PoS algorithm picks validators based on the amount of stake whereas those with the most money staked can theoretically have the most control.

However, Proof of Stake draws the score: holding and staking a certain amount of tokens to become a PoS validator is much easier and more affordable than buying and running mining hardware, which significantly contributes to its decentralization. 

Proof of Work vs. Proof of Stake Security

Security-wise, PoW-based crypto can be considered more protected as it would take bad actors to physically take control of 51% of computers in the network to compromise the blockchain – a highly unlikely scenario. By contrast, PoS needs only a select few stakeholders in order to reach a consensus on transactions, making it more vulnerable to a 51% attack.

Yet, Proof of Stake does have its advantages when it comes to security as well. The main idea behind staking tokens to become a validator is that the funds get locked. Had the stakeholders failed to comply with requirements, a penalty is inflicted. In severe cases, locked crypto funds never get returned to the holder, followed by the elimination of participants from the system. Thus, staking functions as a motivator for users to behave.  

Proof of Work vs Proof of Stake Ethereum

Ethereum has long been an advocate of Proof of Work and has been using it as its consensus algorithm for the majority of its existence. However, in 2019, the team announced plans to move away from Proof of Work as it had become increasingly energy inefficient.

Migrating to the PoS consensus mechanism allowed the Ethereum blockchain to reduce its energy intensity by <99% / Source: Digicoinomist

Ethereum enabled the staking option in December 2020 without the opportunity to withdraw since then up to this day. Following the historic Merge event in September 2022, Ethereum operates a less carbon-intensive PoS algorithm with staked crypto securing the network. 
Now, instead of using massive amounts of computational power, PoS validators need to deposit 32 ETH into the contract at the minimum and download the necessary software.

Currently, the crypto community is expecting the Shanghai upgrade to the network planned for March 2023. The update will finally allow the withdrawal of ETH tokens sitting locked since 2020.  Stay tuned to our blog to learn more about Ethereum staking!

Wrapping Up

The OG Proof of Work demanding high-power computers urged developers to search for alternatives with less energy-intense algorithms for verifying crypto transactions, PoS being one of them. Both consensus mechanisms reviewed have their advantages and vulnerabilities. Ultimately, the emergence of more consensus options shows signs that the crypto world is evolving into a safer and more environmentally-friendly industry, where the competition of ideas is driving progress.