Proof of Work (PoW) and Proof of Stake (PoS) are two of the most popular Sybil resistance mechanisms of any blockchain consensus algorithm.
We did not say that “these are two blockchain consensus algorithms.” A common misconception is that PoW and PoS are blockchain consensus algorithms themselves; this is incorrect.
In this article, we’ll explore the differences between Proof of Work and Proof of Stake, analyzing their pros and cons and how they can enhance the security of blockchain architectures.
What is blockchain consensus?
A blockchain consensus algorithm is a combination of the following:
- A Sybil resistance mechanism
- A chain selection rule
A “Sybil Resistance Mechanism” is a system that helps prevent Sybil Attacks, an attack in which a single user pretends to be multiple users. In blockchain, we want our system to be decentralized, so we need a way to ensure that different nodes on our system are different people.
Bitcoin uses Proof of Work (PoW) to ensure this, where users must run computationally expensive algorithms. Since these algorithms take so many resources (electricity, hardware costs, etc), it’s very difficult for a single user to pretend to be multiple people without buying a lot of hardware and electricity.
Ethereum and many EVM-compatible chains use Proof of Stake (PoS), where each node has to put up a lot of valuable ETH as collateral. For every node on Ethereum, a user has to “stake” 32 Ethereum - which helps prevent sybil attacks because if a single user wanted to pretend to be many users, they’d have to have incredible wealth.
The name for “Sybil attacks” was inspired by a 1973 book called Sybil, a woman diagnosed with a dissociative identity disorder.
51% Attack Prevention
In particular, Sybil resistance mechanisms are implemented so no user or entity can ever control the entire network. In many blockchain setups, if a single entity controls more than half of the network, it can use that power to do malicious things. This is known as a “51% attack.” A Sybil resistance mechanism must make it difficult for a single user or entity to gain control of over 51% of a blockchain network.
What’s a bit funny is that technically, the Bitcoin and Ethereum networks are already victims of 51% of attacks. All blockchain nodes are run by humans on earth, meaning the “human beings” entity has surpassed the Sybil resistance!
What is Proof of Work (PoW)?
Proof of Work is the original Sybil resistance algorithm in a blockchain network, famously implemented in Bitcoin. The first consensus algorithm was created by combining this with the “longest chain rule” - where the longest chain is considered the “real” Bitcoin chain. PoW requires participants (miners) to solve complex mathematical puzzles to validate transactions and create new blocks.
How does PoW work?
- Miners compete to solve a cryptographic puzzle.
- The first miner to solve the puzzle gets the right to add a new block to the blockchain.
- The successful miner is rewarded with newly minted cryptocurrency and transaction fees.
You can view an example of how a PoW chain works on the Blockchain fundamentals course on Cyfrin Updraft.
Pros and cons of Proof of Work
Pros:
- Sybil resistance: PoW provides a high level of Sybil resistance. The effort (work) required to mine blocks makes attempting malicious attacks extremely costly and time-consuming.
- Decentralization: PoW is arguably the most decentralized sybil resistance method by allowing anyone with computational power to participate in mining.
Cons:
- Energy Consumption: PoW is notoriously energy-intensive, leading to criticisms about its environmental impact.
- Scalability: The slow and resource-intensive nature of PoW limits transaction processing speed and scalability.
- Centralization Risks: Even though we just said decentralization is a pro, the fact that particular hardware is good for mining often leads groups that make the best hardware to have the most power over the network.
What is Proof of Stake (PoS)?
One can look at PoW and say, “If I buy enough hardware and electricity, I can run multiple nodes.” In a sense, PoW is just an extension of “if you have money, and you spend that money on hardware, spending money is proof you’re not multiple entities.” Because of this, one could argue that the Sybil resistance of PoW is just “spending money on hardware.” PoS takes this idea and attempts to cut out the middleman of spending money on hardware and have users directly spend or “stake” their money in the protocol to prove they are not multiple users.
Instead of relying on computational power, PoS requires validators to hold and "stake" the blockchain's native cryptocurrency to participate in the consensus process.
Ethereum is one of the popular chains that runs on PoS and uses Gasper as its consensus algorithm. Gasper combines Casper the Friendly Finality Gadget (Casper-FFG) and the LMD-GHOST fork choice algorithm. Together, these components form the consensus mechanism securing proof-of-stake Ethereum. Casper is the PoS sybil resistance mechanism, and the LMD-GHOST fork choice algorithm is the chain selection rule - the two rules needed to make any consensus algorithm! These two rules are a bit more complicated, and we won’t review them here, but you can read more about them in the Ethereum documentation.
How does PoS work?
- Validators are chosen to create a new block based on various factors, including the size of their stake.
- Validators put up a stake as a form of security; behaving maliciously can result in losing some of their holdings.
- Like PoW, successful validators are rewarded, but the energy costs are significantly lower.
Pros and cons of Proof of Work
Pros:
- Energy Efficiency: PoS consumes far less power, aligning better with global sustainability goals.
- Scalability: PoS can process transactions (arguably) faster than PoW without intense computational tasks.
- Reduced Centralization Risk: It's more decentralized because nodes no longer have to purchase expensive mining equipment.
Cons:
- Upfront costs risk decentralization: In PoW, anyone with computing power can join and receive rewards. In PoS, the upfront stake required to participate is often too high for the majority of the world to participate, increasing centralization.
Proof of Work Vs. Proof of Stake
As we’ve seen, both Proof of Work (PoW) and Proof of Stake (PoS) are sybil resistance mechanisms used in blockchain networks, each with unique strengths and trade-offs.
Here’s a comparison of their main characteristics:
Proof of Work (PoW):
- Mechanism: Miners solve complex mathematical puzzles.
- Security: High due to expensive computational and energy costs, making Sybil attacks costly.
- Pros:
- Strong sybil resistance
- Decentralization by allowing anyone with computational power to participate
- Cons:
- Significant energy consumption
- Centralization risks due to the need for specialized hardware
- Scalability issues due to resource-intensive processes
Proof of Stake (PoS):
- Mechanism: Validators are chosen based on the amount of cryptocurrency they stake.
- Security: Validators put up a financial stake, reducing the incentive for malicious behavior.
- Pros:
- Energy-efficient
- Faster transaction processing
- Lower barriers to entry compared to PoW, potentially reducing centralization
- Cons:
- Potential centralization due to the high financial stake required
- Validators with larger stakes have more influence over the network
Both mechanisms aim to prevent Sybil attacks and ensure decentralization but achieve these goals through different methods and with varying implications for security, efficiency, and equity.
Summary
Proof of Work (PoW) and Proof of Stake (PoS) are Sybil resistance mechanisms often confused with consensus algorithms. They are just a piece of the consensus algorithms and are the key mechanism that ensures blockchains are decentralized. If you use a poor sybil resistance method, you’ll create a blockchain that isn’t decentralized!
