Proof of Stake vs. Proof of Work

Proof-of-work and proof-of-stake are consensus mechanisms integral to cryptocurrency security and transactions. They play essential roles in blockchain technology and operation, and despite their similarities, the differences create a chasm between the two. 

This guide delves into proof-of-stake versus proof-of-work to help build an understanding of the differences and applications of each mechanism, so continue reading to learn more!

What is Proof-of-Work?

Proof-of-work initially made its appearance in 1993, proposed as a method to combat spam emails on networks and denial-of-service attacks. Satoshi Nakamoto popularized this concept fifteen years later, in 2008, as a way to validate new blocks within the Bitcoin network. 

The concept hinges on a network user’s ability and capacity to prove they’ve accomplished a computational task. To solve mathematical equations, the individual employs computing power, known as a node, which is any physical device that can send, receive, or forward data within a network (such as a personal computer). 

Using this model, cryptocurrency miners can compete against each other, using powerful computers to solve intricate, complicated problems. The first individual to solve the problem receives authority to add the new block of transactions and is given digital currency for their efforts. 

Once the block is authenticated, it gets added to the blockchain. To maintain speedy, efficient work, proof of work requires fast computers, access to energy resources, and processes that impact transaction times as the network evolves and multiplies. 

The Upsides

The proof-of-work system offers a range of benefits to participants, from security to incentivized competition. A few notable upsides include:

• Renewables transition: Given the vast amount of energy required to power the proof-of-work system, costs can quickly climb. So, many miners are seeking cheaper forms of energy to lower their overall costs. In doing this, they’re turning to renewable energy, which is driving the switch as it becomes more affordable than other energy forms. 
• Dual security: The proof-of-work system offers some semblance of security via its upfront costs associated with hardware and ongoing electric costs. As of now, proof-of-work is the most proven way to uphold consensus and security over a distributed public network. 
• Valued energy: Energy can become trapped in remote areas, where it sits unused. The proof-of-work system demands copious amounts of energy, blazing through these otherwise unused energy stores. This creates value from unused energy simply via an internet connection and hardware. Two excellent examples of converting unused energy into value are China’s Sichuan and Yunnan provinces, where intense wet seasons generate vast amounts of renewable hydroelectric power. Since the communities have no way to ship and sell this energy, it sits unused. 
• Healthy competition: Since PoW hinges on a miner’s ability and capacity to complete work quickly, the system promotes healthy competition. Those who finish first receive a reward, which incentivizes speed and overall efficiency. 

The Downsides

Although the proof-of-work system has its benefits, there are a few downsides that may deter potential participants. Notable drawbacks to the system include:

• Vast energy consumption: Miners need access to immense amounts of energy to supply energy to the powerful computers necessary for PoW. Bitcoin, for example, consumes more power than entire nations, such as Norway and Ukraine. 
• Traceable: The proof-of-work system demands excessive energy, which is traceable. So, authorities can locate these mining facilities using energy consumption data and shut them down. This has already occurred in certain areas, including China, which banned cryptocurrency mining. 
• Electronic waste: In crypto mining, e-waste is a significant issue. Innovations in chip speed and efficiency dominate the industry, constantly forcing miners to update to remain on top of the industry. This makes older chips useless, as they cannot compete with the newer, faster options, so the industry generates considerable electronic waste. 
• Monopolized industry: Unfortunately, monopolies can become prevalent within the mining industry at multiple levels. Monopolies can take over the ASIC chip manufacturers and mining companies themselves. 

What is Proof-of-Stake?

Proof-of-stake originally appeared on the scene in 2011 after individuals proposed a new approach on the Bitcointalk forum. This particular approach would target the inefficiencies of the proof of work consensus mechanism and decrease the number of computational resources necessary to operate this network. 

So, unlike proof of work, where miners perform tangible work, this concept hinges on the existence of a verifiable stake in the ecosystem. In the proof-of-stake system, these individuals are known as validators. 

These validators are chosen to locate a block based on how many tokens they have, unlike proof-of-work, where miners need to compete in a competition to determine which node gets to add a block. The “stake” amount in this system, which represents the quantity of crypto the validator holds, takes the place of miners’ work in proof-of-work. 

While proof-of-work networks aren’t particularly secure, the staking structure ensures a secure network. Participants must purchase the crypto, hold it to be selected from a block, and eventually earn rewards.

So, participants have to spend money and allocate their financial resources to the network. When they spend money on coins, they earn these rewards, creating a vested interest in the network’s continued success. 

The Upsides

Like the proof-of-work system, the proof-of-stake system has its fair share of benefits to entice potential participants. A few upsides include:

• Energy efficiency: Unlike the proof-of-work system, the proof-of-stake system requires very little energy to secure a blockchain. So, it’s much more energy efficient in the long run. Many validators working within the proof-of-stake system can use an average computer for working. 
• Better throughput: Since validators don’t need to solve complex computer problems, they can significantly increase transaction speeds, leading to increased throughput. Instead, algorithms select validators based on how many tokens they hold. 
• Low barrier to entry: To earn rewards in a proof-of-stake system, validators don’t need any specialized hardware, which lowers the barrier to entry and makes it widely available to more potential participants. The only cost associated with the system is purchasing tokens to participate. 
• Low traceability: The proof-of-stake system uses minimal amounts of energy, so tracing and identifying it is nearly impossible. So, authorities are unable to easily censor and shut down these systems. This allows many individuals who would otherwise be unable to participate. 

The Downsides

On the flip side, the proof-of-stake system has areas for improvement. The downsides of this system include:

• Centralization: Since the proof-of-stake system incentivizes coin hoarding by promising rewards, issues with centralization may arise. This issue raises the importance of the initial distribution of proof-of-stake coins, as hoarders may cause problems with coin consolidation. 
• Lesser security: Given the low barrier to entry, the proof-of-stake system has less robust security than the proof-of-work system. Participants don’t contend with nearly any ongoing costs and only have one upfront cost, leading to less robust security. 
• Unproven at a larger scale: The proof-of-stake system has only recently reached larger scales with the Ethereum transition. However, there will likely be little issue. 

Proof-of-Work vs. Proof-of-Stake

Comparing proof-of-work systems with proof-of-stake systems draws attention to several significant differences between the two. 

Energy consumption is arguably one of the most prevalent differences between these consensus mechanisms. Proof-of-work systems demand excessive amounts of energy, forcing miners to seek more renewable forms of energy to lower ongoing energy costs. 

On the other hand, proof-of-stake systems consume minimal amounts of energy. So while a miner working within the proof-of-stake system might be sitting in a warehouse filled with massive whirring computers, a validator working within the proof-of-stake system could be using a laptop in the corner of a cafe. 

Another significant difference between these mechanisms is the risk of attack. In proof-of-work systems, miners expend resources to compete against other participants while they solve cryptographic equations. This system hinges on miners acting in good faith and participating within consensus rules. 

However, a majority attack is a considerable concern within the proof-of-work system. If a group gains over 50 percent of mining power, they hold the playing cards of the system, in a sense. For example, once a singular group controls this much power, they can spend coins twice, prevent transaction confirmations, and create forks within the blockchain (which can make alternative versions of the blockchain appear valid). 

On the other hand, validators within the proof-of-stake system are only able to validate blocks if they supply a “stake” or security deposit. Since the network has collateral from the validator, this discourages potential attackers from confirming illegitimate transactions, as this would penalize them since they lose their stake. 

Is One Better Than The Other?

Proof-of-stake and proof-of-work systems have their merits, so one isn’t necessarily better than the other. However, in many aspects, the proof-of-stake system holds an edge over the proof-of-work system, despite its smaller, unproven size. 

The proof-of-stake system has yet to scale to the massive size of Bitcoin– however, with “The Merge” of Ethereum in September 2022, it now uses proof-of-stake.

Consider energy consumption between these mechanisms. In this aspect, proof-of-stake is the superior choice, as it consumes far less energy than proof-of-work systems. In fact, Ethereum is expected to use 99.95% less energy after transitioning from proof-of-work to proof-of-stake. Turnover is much quicker, as validators don’t have to solve complex cryptographic problems. 

In addition, the lower energy consumption of validators within the proof-of-stake system makes them almost untraceable. So, the system offers a degree of censorship resistance, as validators can work from small, average-powered laptops instead of in a massive warehouse with thousands of computers pulling substantial amounts of energy. 

Another positive of proof-of-stake systems is their minimal electronic waste, especially compared to proof-of-work systems. Electronic waste is a prominent critique of proof-of-work systems, as miners continually need to update their systems to keep up with demand. 

In many cases, miners run their systems at full power 24/7, occasionally in poor conditions (high humidity, elevated temperatures, inadequate ventilation). This leads to a shorter equipment lifespan, forcing miners to replace equipment regularly. On top of that, chip manufacturers regularly put out new, faster, more effective chips, forcing miners to replace old chips to keep up with the industry. All this turnover leads to massive amounts of electronic waste, which is a relatively rare occurrence in the proof-of-stake system. 

Final Thoughts

With the above factors in mind, it’s essential to recognize that neither proof-of-stake nor proof-of-work is perfect. Both systems have flaws that affect their overall performance and efficiency, so one isn’t necessarily better than the other. 

While the proof-of-stake system might be the superior option in some categories, it has its weak points. So, the best system for one individual might not be the ideal choice for another. Ultimately, deciding between the two isn’t an either/or decision, as both consensus mechanisms will likely remain standard in cryptocurrency for many years.

To learn more about blockchains that use proof-of-stake and proof-of-work systems, visit Netcoins’ Crypto Academy. 

Now that Ethereum is a Proof-of-Stake blockchain, buy Ethereum with Netcoins.