Proof of Work vs Proof of Stake: Which is better? This debate has gone on within the cryptocurrency sphere for a while now. This is article seeks to define and compare the benefits of both.
To create a new block on the blockchain, there must be some sort of ‘mining’ to be done.
This mining’s purpose is to validate and verify the transaction so that there is no fraudulent transactions or double spending.
On the process of mining rests the integrity of the blockchain, and prevents any bad actors from taking advantage, which can be easy otherwise in a digital world.
The miners support the ecosystem of the cryptocurrency and ensure that transactions get through smoothly, securely and without error.
Both Proof of Work and Proof of Stake are ways to generate new blocks on the blockchain, but their method to do so differs.
Proof of Work Mining
Traditionally, you would rely on third-parties to process your transactions. Companies like Paypal, MasterCard and Visa hold your ledgers in their centralized servers.
With Proof of Work mining, these ledgers are held by every miner and are therefore decentralized. These ledgers are updated periodically with new blocks, with each block holding a set of transactions.
In order to get a reward, miners have to use their computing power to race to solve a complex mathematical equation. The computer which solves the problem first gets the privilege to add the candidate block on the blockchain and gets a reward for its effort from the protocol.
Once the problem is solved, the answer is transmitted to the other miners who then verify the answer, and add the solved block to the chain. When the block is solved, it means that the transactions now exist immutably on the public blockchain.
Once that is done, they start competing to form the next block and this goes on.
On the bitcoin blockchain, a new block is formed every 10 minutes and so every 10 minutes, these miners are competing to solve the candidate block.
Using an analogy, imagine this.
The teacher flashes a math equation once every 10 minutes on the screen in a classroom of 40 students. The 40 students race to solve it, and the first student to solve it shouts out the answer. The other 39 students who did not solve the problem take the answer and work backwards to verify if it is correct. Once that is confirmed, the student who solved the equation gets a reward from the teacher.
In this case, the student with better math ability is likened to having higher hash power (or a faster computer). Hence, it is more likely that this student will solve the problems before everyone else (and gets the reward).
In the real world, corporations can get higher hash power by purchasing more mining rigs. One of the biggest Bitcoin Proof of Work miners in the world are in China, Bitmain run by Wu Jihan.
Looking at the big picture, what this essentially accomplishes is converting electrical power to digital currency.
It is likened to gold mining, where expensive equipment and energy is spent to mine gold off the ground. But the cost of doing so is inputted in its value, hence making gold scarce and valuable.
In here also lies the biggest criticisms of Proof-of-Work: It’s environmental unfriendliness. Right now, Bitcoin mining harnesses more electricity than 159 of the world’s countries.
Here are some examples of Proof of Work Consensus Cryptocurrencies:
Is there a better way to do this? A better way that is environmentally sustainable and yet at the same time preserves the security of the ecosystem.
Some people suggest that Proof-of-Stake might be the solution.
Proof of Stake Forging
In Proof-of-Stake, it’s not called mining, but forging. In the case of Proof-of-Stake, there is no mining reward. i.e. no reward for solving equations.
Instead, forgers earn from transaction fees within the ecosystem.
While Proof-of-Work mining rewards are determined by a miner’s collective hash power, the Proof-of-Stake forger’s ability to form a new block is determined by the number of cryptocurrencies that forger owns and also how long the user has been forging.
For example, ARDOR is a Proof of Stake cryptocurrency, and a minimum of 1000 ARDOR to get started forging. If you own 1000 ARDOR and there are about 1 million ARDOR being forged by others, then your chance of forging the next block is about 1000 over a million, which is about 0.1%. That is assuming all the forgers have been forging for an equal amount of time.
So in this case, the more ARDOR you own, the more likely you’ll be able to forge a block which has a set of transactions in there and you’ll earn from the fees paid by the transactions within that block.
If Proof of Work is like a bunch of students rushing to solve an equation, Proof of Stake will be like someone speculating on the lottery. The more tickets he/she buys, the more likely the chance of hitting the jackpot.
In order to orchestrate an attack on a Proof of Stake system, the hacker must obtain 51% of the coins. To which then it makes completely no sense for the hacker to attack it, for he now has incentive to see it rise in value!
Some Proof of Stake coins are as follows:
However, one of the criticisms of Proof of Stake is that it incentivizes users to simply forge the coins instead of actually using them. The more people stake the coins, the less in active circulation and supply.
So Which is Better?
Obviously, Proof of Work mining is far more energy inefficient.
According to Digiconomist’s Bitcoin Energy Consumption Index Bitcoin’s current estimated annual electricity consumption stands at 57.86TWh. ( as of 27 March 2018).
This is 0.26% of total global electricity consumption. For the mine of a single digital currency, this is huge. According to the site, Bitcoin mining at this current rate can power over 5.7 million U.S. household.
What’s more, as Bitcoin develops to become a mainstream currency, it may get even more expensive to mine and consume even more power.
While Proof of Work makes it difficult for bad actors to conduct attacks, it may not be sustainable in the long run.
Proof of Stake, however, because it depends almost on leaving a computer on for forging, consumes far less electricity and is much more energy efficient.
However, the proponents of Proof of Work argue that because the costs used to acquire new coins is real, i.e. electricity power and graphics cards. It imputes real value to the underlying asset, much like gold or silver mining.
If gold or silver were made available that easily by having no work done, then, therefore it is not really valuable. Likewise for Proof-of-Stake coins. Would you rather buy a coin that took real electricity and computing effort to create, or would you rather buy a coin that was created purely out of a code?
Obviously, Proof of Work coins are far more valuable in this case. However, is the trade-off worth it?
A 51% attack
Even though there is a reward for crafting a block, it decreases over time to reflect a flattening supply. This scarcity means that coins will appreciate in value, rewarding the holders and investors.
However, for the miners, as the rewards drop over time. There may be less of an incentive to continue ‘protecting’ the coin from a 51% attack.
By controlling 51% of the computing power of hash rate, a group of attackers can theoretically prevent new transactions from confirming, halt payments, reverse the blockchain entries, or even commit double spend.
This is a scarey possibility that a group of bad actors can take control of a coin completely and do as they wish with it.
In fact, Krypton and Shift, two blockchains based on Ethereum, suffered 51% attacks in August 2016. While these are smaller coins, but it shows that it is theoretically possible for it to do so.
Under a Proof of Stake system, an attacker must own 51% of all coins in existence in order to do so.
It seems far less likely for this to happen, for a person who owns the coins wants to see it appreciate in value. Also, to own 51% of all coins means you must have the financial capability of buying up 50% of the market cap, assuming people want to sell.
If you want to do that for Bitcoin, it means you have to buy at least $70 billion worth of it, assuming people want to sell!
In this aspect, Proof of Stake appears more secure.
Proof of Work started out with the intention of being decentralized. The earliest Bitcoins could be mined using a laptop or computer. However, as Bitcoin became more popular and rose in value, it became profitable to compete with more computing power.
Hence, rigs with high computer power began to be produced. These compared to laptops were like Ferraris competing with trucks. There was no contest.
And more than that, mining farms with combined computer power began to form. Now, China has one of the largest mining farms in the world. In a mining center, as many as 2500 mining rigs would be inside, all using power to compete to solve equations and earn Bitcoins.
The average person, right now, is pretty much unable to compete at this level. Hence, eventually, all Proof of Work mining becomes centralized. This is not a good thing as the whole idea of bitcoin was decentralization in the first place.
In the Proof of Stake, forging is far more decentralized. Anyone who owns a certain number of coins is welcome to create his/her own node and start forging.
All they need is a running computer, install the software for the coin, buy the coins and they’re able to start forging the coin.
However, this means that Proof of Stake coins require a strong decentralized community to keep the coin going. This may be tougher to achieve given that more and more cryptocurrencies are joining the fray.
A Hybrid Model?
While both sides have their proponents, it is still too early to say which would win out in the long run. It is more likely that both will co-exist rather than one method eliminating the other.
Seeing there are merits to both Proof of Work and Proof of Stake, some cryptocurrencies have even begun developing hybrid models, hoping to incorporate the best of both worlds. Coins like Dash, Stratis and PIVX are some examples.
While the debate is still up in the air, the good thing is that cryptos exist as code, and really nothing is set in stone. If one day the miners decide that a new protocol works better for the ecosystem, then change is possible.
On the horizon, there are even new mining models coming up, like Proof-of-Intention or Proof-of-Reputation. All these are new models worth exploring, but are still in early stages.
Do you think Proof of Work or Proof of Stake is better? Comment below!