The Differences Between Proof of Work and Proof of Stake Protocols
When the first blockchain system was launched in 2008, it operated on the proof of work protocol. This first cryptocurrency is Bitcoin. It still operates on the same PoW, just as some new blockchains that emerged after Bitcoin. But why do some blockchains operate on the new proof of stake protocol?
Since there are two models, there must be a reason behind creating the second one. Proof of work is a solid protocol that works perfectly fine, if not for some serious disadvantages. Check out the article to learn more about PoW and PoS, what are their advantages and disadvantages, and some other details you might be interested to find out.
How does the Proof of Work Function?
The proof of work or PoW is a decentralized mechanism that works based on consensus. The members of the decentralized network need to solve a puzzle or rather a mechanism in the case of cryptocurrency. As a decentralized mechanism on the blockchain, it is needed to solve algorithms (mine) and approve transactions.
Mining and approving or validating various financial operations is called mining. In simple words, to verify a transaction, miners need to solve algorithms. When the algorithm is solved by one of the miners or a group of miners (mining pool), they get an exclusive right to add the block to a blockchain.
When the block is added to the blockchain upon solving the algorithm, the validator adding it gets an award in crypto tokens used by the current blockchain. At the same time, the transaction is validated when the block is added.
For example, you want to buy some services by using Bitcoin. You request the purchase to be processed. At this moment, a new block appears on the Bitcoin blockchain and many miners compete with each other to add this block to the Bitcoin blockchain. When they add the block, they get the reward in the form of a fee that you paid, and your transaction is confirmed and completely processed.
During the mining process, miners all over the world compete with each other to add a block to a decentralized blockchain system. When they add the block, they get a reward for using their resources. And when they get the reward for adding a block, a transaction is confirmed.
This is how the proof of work essentially works. It requires mining to process transactions. It’s considered a cheaper way to make transactions or buy goods/services since you don’t need a central authority to process financial operations.
For example, when using banks, you pay fees to a third party, to a bank in this case. The bank requires you to pay for your transactions since they take resources. But when you use a decentralized blockchain system, you don’t need to pay the central authority to process your payment. Instead, it is done by groups of miners, and fees are lower than fees for using bank services.
One of the reasons why proof of work protocol is under heavy criticism is the confirmation or validation process of financial operations. To confirm just one financial operation and add the block to the decentralized chain, miners all over the world are depleting too many resources.
The electricity used to confirm operations even has a negative impact on our environment. That’s why the proof of stake was introduced. The PoS protocol allows owners of stakes to validate transactions according to the number of coins that they hold. Meaning, a miner can’t mine more than they hold, so there is no reason to use so much power to mine since it’s not possible.
The proof of work mechanism allows you to mine as much as you want. You may be spending loads of energy, just like all other miners. The problem is that the more power miners consume, the higher are the fees on using the blockchain.
What Blockchains Operate on PoW?
More blockchains operate on a proof of work mechanism. The list includes the following names:
- Bitcoin Cash.
- Ethereum Classic.
- Litecoin Cash.
Many other cryptocurrency blockchains also operate thanks to the proof of work mechanism.
Advantages and Disadvantages of Proof of Work Protocol
Even though PoW has a lot of disadvantages, there is a reason why so many blockchains still use this protocol. Here are some of the advantages of the PoW mechanism:
- The most popular and used protocol.
- It is scalable.
- It is easy to use PoW to build various applications.
And as for the disadvantages, there are more of them than advantages:
- It’s unsustainable. The amount of power required to support PoW keeps increasing, reaching an all-time high. Because of this protocol, miners leave a significant carbon footprint in the environment.
- Often miners produce electrical waste since ASIC machines that are used for miners serve just one purpose. ASICs have more hash power so that miners prefer them rather than CPUs or GPUs. But the latter two options can be used for other purposes, but not ASICS.
The main concern of most people is the negative effects on the environment. Moreover, high power consumption raises fees, and the blockchain isn’t as convenient anymore. Not to mention the slow confirmation process. Sometimes it takes days to get your transaction processed.
How does a Proof of Stake Work?
If a user prefers a blockchain that operates on a proof of stake protocol, they can become the owner of the stake. To become one, they need to lock some of their coins. Upon locking these coins, the user becomes a node in the blockchain system.
Each node has the right to validate transactions within the blockchain. That’s how mining works within the proof of stake world. A user is rewarded for holding the coins rather than selling or trading crypto. It makes the cryptocurrency a bit less volatile since users are more interested in saving coins and operating as a node to get awarded.
Mining of coins
Instead of allowing everyone to mine as much as they want, the PoS protocol is more balanced. If you own a certain stake, your mining power is limited to the number of coins that you have in this stake. In simple words, the more coins you have in your stake, the more coins you can mine.
The user’s individual mining power is simply limited since they can’t bite off more than they can chew so to speak. Instead of spending a lot of money on buying expensive and power-hungry ASICs, an owner of the stake can simply use the computer GPU or CPU. Such a method reduces energy consumption and doesn’t lead to such a huge carbon footprint.
Overall, PoS a miner gets the amount of power to mine coins that are equal to the proportion of coins owned by this miner. A miner does not need to use a lot of power to solve the algorithm. Instead, the miner has a limit on the number of transactions to process according to the size of the stake. For example, if a miner has 1% of coins currently available, they may mine only 1% of transactions.
If a user of the network has a stake, they become a validator. A validator can confirm or approve a transaction within the blockchain by simply holding the stake. Instead of selling coins, a user locks their coins and becomes the owner of a stake.
List of Blockchains for PoS
These are the names of blockchains using proof of stake protocols:
- NEAR Protocol.
Compared to other blockchains, these networks are newer. There are fewer PoS than PoW blockchains.
Advantages and Disadvantages of Proof of Stake Protocol
The advantages of the PoS protocol are as follows:
- More efficient and balanced algorithm thanks to limiting miners’ ability to mine depending on their stake size.
- Consumes less power than PoW protocol.
- Doesn’t leave that big a carbon footprint on our environment.
- The PoS protocol is less convenient in terms of attacks on the system from miners.
- Makes the coins less volatile.
But there are also disadvantages of the PoS protocol:
- Less accessible.
- Isn’t always suitable when it comes to developing applications within systems that operate on PoS mechanisms.
- Even though it’s less convenient for miners to attach PoS systems, the overall ecosystem might have more vulnerabilities when it comes to hacker attacks.
As for people who would like to invest and become stake owners, there is one danger. If the coin drops in price, you won’t even be able to sell your stake since it is locked for a certain period.
Why is Proof of Stake Considered Better than Proof of Work?
The main reason why everyone criticizes the proof of work algorithm is because of huge energy consumption. It is estimated that just one confirmation of a Bitcoin transaction requires the same amount of power required to power 1.5 American households per day!
Proof of stake solves this problem by limiting the number of transactions based on the percentage of coins that you have in the stake. Some blockchains even allow stake holders to delegate their tokens to some staking pools with a good reputation. For that, they get a reward – coins from the blockchain that they are using!
Yes, Proof of Stake has some security issues. It seems that such a system is more susceptible to attacks. This is probably why there are still so many blockchains that operate on the PoW algorithm. But in the long run, proof of work protocol is unsustainable.
The amount of power required to confirm transactions is ridiculously high. Not to mention that miners need to invest in expensive mining rigs to be able to solve complicated algorithms.
In the world of proof of stake mining, any user can become a miner, and they don’t even need to invest in expensive mining equipment or receive high electricity bills.