Learning outcomes:
By the end of this article, you will understand:
- What Proof-of-Stake is
- What Proof-of-Work is
- The strengths and weaknesses of each approach
Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the two dominant methods used by decentralised blockchain systems to reach a consensus on the accuracy of their data.
Their relative effectiveness depends on finding the right combination of equity, incentive, and censorship resistance to produce a system that reliably records data transactions without needing a referee and cannot be corrupted.
PoW & Bitcoin
Bitcoin’s consensus mechanism is designed to enable a network of independent computers to reach an agreement on transactions of a peer-to-peer cash system.
The biggest challenge its creator, Satoshi Nakamoto, faced was creating a self-regulating and honest system that stopped bad actors from trying to spend a ‘coin’ twice by rewriting the historical transaction record.
What PoW means
Miners have the job of adding a new batch of valid transactions (a data block) to the historical Bitcoin blockchain. But they can only do so when they prove they have performed sufficient work.
The work amounts to expending computing power running a cryptographic hash function called SHA-256, the difficulty of which is adjusted to ensure new blocks of transactions are produced every 10 minutes.
Bitcoin’s implementation of SHA-256 is often described as a lottery, with Mining Nodes competing to find the winning number.
Their work is rewarded with new bitcoin, creating a carefully designed economic model that naturally tends toward honest behaviour without outside interference or explicit policing.
PoW, therefore, produces blocks of historical transaction data chained together with cryptographic timestamps. The energy required to rewrite the chain and double-spend successfully would be so expensive that rational participants instead pursue the economic rewards of sticking to the rules.
Each watt of additional hash power strengthens this logic, making the system more resilient.
Other notable Proof-of-Work implementations
Bitcoin isn’t the only cryptocurrency to use PoW as a consensus mechanism. There are over 100 forked versions of Bitcoin (copies), the most prominent being Bitcoin Cash and Bitcoin SV. The data blocks of these cryptocurrencies have a different storage capacity to Bitcoin, and they have visible founders (unlike Bitcoin, whose pseudonymous creator, Satoshi Nakamoto, stopped any form of communication at the end of 2010).
Other notable PoW coins include Dogecoin, Litecoin and Monero.
Proof-of-Stake consensus
The main concept of Proof-of-Stake consensus mechanisms is having skin in the game, as you can only add new blocks to the chain if you hold a financial stake in the system.
Stakers commit a minimum amount of the native currency, which is usually locked away for a specific period of time.
As with PoW, there is a random selection process, with stakers chosen at regular time intervals to propose newly validated blocks of transactions. For this reason, you’ll also see stakers described as validators.
Ethereum & Proof-of-Stake
Ethereum only moved to PoS last September in an event called the Merge, but we can use it as an example, given it is the second most important blockchain by market capitalisation.
Full Nodes acting as validators (aka stakers) are chosen at random every 12 seconds to create new blocks and validate transactions. To act as a validator, you must stake 32 ETH. Staking more doesn’t increase the chances of selection.
The alternative is to contribute less than 32 ETH to a staking pool. A staking pool is run by a single validator that you delegate proposing power to, earning rewards proportionate to your contribution to the pool.
Staked ETH acts as collateral; it’s a financial commitment to discourage dishonest behaviour, such as attempting to double-spend, as the stake can be slashed or seized as a penalty.
Other notable examples of Proof-of-Stake
Several of the top ten coins by market capitalisation use a modified version of PoS, including BNB (the native currency of the Binance Smart Chain), Cardano, Polygon, Solana and Polkadot.
Comparing PoW with PoS
PoW and PoS take different approaches to solving the same problem, which is encouraging voluntary participants in a network to honestly record data.
PoW uses a combination of effort and reward. PoS relies on a financial pledge.
Environmental impact is one of the biggest differences. Ethereum estimates by switching from PoW to PoS after the Merge, its CO2 emissions fell by 99.992%. Meanwhile, Bitcoin supporters point to the increasing contribution of sustainable energy sources to producing a more secure energy-based network.
Both consensus models face scalability constraints but are flexible enough to support off-chain (layer 2) solutions that allow faster and cheaper transactions. Eventually, they could rival traditional payment networks like Visa or Mastercard.
Both models are susceptible to attack when the network is starting, but security improves exponentially through Network Effects. Correspondingly, validating and mining power tends to consolidate over time.
PoW halving models can create better wealth distribution over time, whereas PoS doesn’t allow larger holders to enjoy greater enrichment, but inequality is a societal problem that technology alone cannot solve.
Satoshi Nakamoto’s decision to relinquish any influence over the system he created should be seen as an exception. Every other PoW or PoS chain has visible founders and foundations that can exert influence and hold powerful financial interests.
It is impossible to launch a blockchain in a fully decentralised way, while their permissionless nature means that anyone can fork them and change the rules, which has happened to both Bitcoin and Ethereum.
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