Proof-of-Work vs. Proof-of-Stake: Which Is Better?

Proof-of-work and proof-of-stake are consensus techniques or algorithms that enable blockchains to function safely. These consensus algorithms safeguard blockchains by allowing only legitimate users to contribute new transactions.

They function by requiring potential members to demonstrate that they have committed some resource, like as money or energy, to the blockchain. This function assists in weeding out people who are not genuine or devoted to the network. The primary distinction between proof-of-work and proof-of-stake is the method by which they determine who can add transactions to the chain.

What is proof-of-work？

Proof-of-work is a system in which computers compete to be the first to solve complex challenges.

Because the energy and resources required to complete the puzzle are often considered the digital counterpart to the real-world process of mining valuable metals from the earth, this process is commonly referred to as mining.

In his book “Digital Gold,” Nathaniel Popper provides an analogy to describe proof-of-work in the Bitcoin system:

“It's quite simple to multiply 2,903 and 3,571 using a piece of paper and a pencil, but it's much, much more difficult to figure out what two numbers can be multiplied together to reach 10,366,613.”

Using this analogy, imagine a miner in the Bitcoin network trying to figure out which two numbers can be multiplied to get 10,366,613 by guessing number combinations until it finds the proper answer. When a computer determines that 2,903 multiplied by 3,571 equals 10,366,613, it presents the solution to the other computers in the network, which can simply verify that 2,903 and 3,571 do, in fact, equal 10,366,613.

When a miner solves this “puzzle” before other miners, they are permitted to generate a new block (a grouping of transactions) and broadcast it to the network of nodes, which will then execute audits of the existing ledger and the new block separately. If everything checks out, the new block is “chained” onto the preceding block, creating a transactional chain. The miner is subsequently compensated with bitcoins for providing their resources (energy).

Proof-of-work, mining and security

Mining consumes a lot of electricity and secures the network by ensuring that only those who can prove they have expended resources are allowed to add new transactions to the blockchain.

Because of this feature, attacking a proof-of-work system like Bitcoin is difficult, time-consuming, and costly. Attackers would have to buy and set up mining equipment as well as pay for electricity to power the equipment. They would then compete to solve the problem and add a block of transactions containing fake bitcoins to the chain.

If the evil miner solves the riddle first, they will attempt to broadcast a new block of transactions to the rest of the network. The nodes of the network would then conduct an audit to evaluate the authenticity of the block and the transactions included within it.

The counterfeit bitcoins would be discovered as the nodes audited the new block against the prior version of the ledger. According to consensus rules, the block is invalid.

Proof-of-work makes it difficult to forge bitcoin unless a malicious miner controls more than 50% of the entire network – this implies they must control at least 51% of both the aggregate computer power of miners, known as the hashrate, and the network nodes. If the bad actor did control more than half of the network, they could broadcast a bad block to the network and have their nodes accept the block into the chain.

Given the size of the Bitcoin network and the amount of energy miners donate to the proof-of-work system, such an attack would be almost unfeasible today.

If a government, company, or other entity successfully gathers enough resources to make up more than 50% of the network with the intent of attacking it, the network's genuine participants will most likely create a new branch of the chain, also known as a fork, rendering the previous chain and the attack against it ineffective.

What is proof-of-stake？

Instead of having an arbitrary competition between miners choose which node can add a block, validators (the proof-of-stake equivalent of miners) are chosen to find a block based on the number of tokens they have in the proof-of-stake system.

The “stake” amount, or amount of crypto a user possesses, replaces the labor miners do in proof-of-work in this system. Because a potential participant must purchase the cryptocurrency and retain it in order to be picked to build a block and earn rewards, this staking mechanism secures the network.

Participants must spend money and devote financial resources to the network in the same way that miners must expend electricity in a proof-of-work system. Those who have paid for coins in order to receive these benefits have a vested stake in the network's future success.

Proof-of-stake uses the same principle as proof-of-work to avoid attacks and counterfeit coins. Rather than holding 51% of the mining hashrate and nodes, like with proof-of-work, attackers of a proof-of-stake system would need to have at least 51% of the coin supply and control at least 51% of the network's nodes.

Pros and cons of proof-of-work and proof-of-stake

Proof-of-work pros, explained

Healthy competition and renewable energy

Bitcoin mining is a very competitive industry. Mining companies are continually looking for the most effective techniques to mine in order to reduce their costs. This process naturally encourages those who can find the lowest types of energy and develop newer technologies to produce faster and more efficient mining chips.

In addition to benefitting cryptocurrency mining, competition among chipmakers can lead to improvements in computer technology that can be applied to businesses other than cryptocurrency mining.

Trapped energy

Crypto mining enables some communities to transform their trapped energy into some form of value, which may then be transferred or used to support other projects, producing economic activity in isolated locations.

Two real-world examples are China's Sichuan and Yunnan provinces. These provinces have lengthy wet seasons that can generate massive amounts of renewable hydroelectric power. Unfortunately, the provinces lack the infrastructure to transmit and sell this energy to other locations.

The provinces began mining bitcoin in order to capture excess energy and transform it into a tradable commodity. Because of these cheap power sources, China accounted for more than 70% of Bitcoin's hashrate in September 2019. Later, as it moved to build its own fiat digital currency, China prohibited crypto mining. The relocation triggered a major flight of miners to neighboring places with inexpensive power. As a result, Kazakhstan, along with Iran and the United States, became mining hotspots.

Security

So far, proof-of-work has shown to be the most reliable method of maintaining consensus and security in a distributed public network. This is due to the fact that, unlike proof-of-stake, proof-of-work necessitates the purchase of hardware as well as continuing resource expenditures.

Bitcoin was launched in 2009 and has had an uptime of more than 99.98%. There have only been two instances of downtime as of this writing: once in August 2010 and once in March 2013. These two problems were resolved with opt-in software updates to nodes; thanks to the consensus method, network participants all agreed that these changes were in the best interests of the collective network.

Proof-of-work cons, explained

Energy consumption

Bitcoin and other proof-of-work blockchains, such as Ethereum, use a lot of energy to offer security to their networks. Bitcoin consumes more energy than entire countries, such as Ukraine and Norway. Environmentalists claim the practice is wasteful.

Rebuttal: While these technologies require vast quantities of energy, many opponents fail to consider the types of energy utilized in mining and instead attribute its high energy consumption to a large environmental imprint. However, research has revealed that bitcoin miners use a variety of energy sources in their operations. According to some estimations, renewable energy accounts for 50% to more than 70% of overall power consumption.

It should be noted that many of these studies only report on mining corporations and other enterprises that engage in surveys.

E-Waste

The most valid critique of the bitcoin network's resource use may be electronic waste. Proof-of-work miners often run at full power 24 hours a day, seven days a week. Poor conditions, such as humidity, high temperatures, and insufficient ventilation, can have an influence on mining facilities and limit equipment lifespan.

ASIC chip manufacturers are also continually producing newer, more efficient chips. When a new chip is introduced, older chips become less successful at winning blocks than newer chips. Older chips are eventually phased out and become e-waste.

Rebuttal: Current ASIC mining chips have a lifespan of three to five years. While newer chips will eventually replace older ones, they will likely survive longer because they are more efficient and resistant to high temperatures and prolonged hashing.

Traceability

Other crypto mining problems include censorship and traceability, which have already occurred in locations such as China, where cryptocurrency mining is prohibited. Electricity readings or even thermal cameras might be used to locate the massive power use. The ability to track the location of crypto mining empowers anti-crypto governments to crack down on the practice.

If a country restricts mining to individuals who have obtained a license, it may harm decentralization by not allowing the network to be entirely open.

Outside of China, nations all around the world appear to be pro-crypto in some way. Mining regulation may be considered by some governments. However, as long as miners may continue to operate in remote places, monopolization and censorship should be avoided.

Proof-of-stake pros, explained

Efficiency

Proof-of-stake systems consume substantially less energy than proof-of-work activities. Many proof-of-stake systems have hardware requirements that are comparable to normal laptops on the market today. In most proof-of-stake systems, validator software is also not extremely demanding.

Increased throughput

Instead of a competition among miners to solve a challenge, validators are picked to locate a block depending on how many tokens they own in proof-of-stake. The time it takes the proof-of-stake algorithm to choose a validator is substantially shorter than the time it takes the proof-of-work algorithm, allowing for faster transaction rates.

While this is correct, all blockchains, proof-of-stake or otherwise, are hindered by the process of nodes reaching consensus when a validator broadcasts the newly discovered block to them.

Censorship resistance

Unlike proof-of-work validators, which require a lot of energy and a lot of physical presence, proof-of-stake validators can run on modest laptops. This means that instead of a warehouse filled with thousands of humming computers, a single validator controlling a third of a worldwide distributed monetary network may function in the corner of a coffee shop.

Lower barrier to entry

Proof-of-stake validators only need to spend money once to participate – in the proof-of-stake paradigm, they must acquire tokens to win blocks. In contrast, a miner in a proof-of-work system must buy mining equipment and keep it running continuously, incurring variable energy expenses. This enables more people to participate who would not otherwise be able to.

Proof-of-stake cons, explained

Unproven at large scale

Proof-of-stake systems have yet to reach the size of Bitcoin or Ethereum. As a result, proof-of-stake systems are less decentralized and safe than leading proof-of-work systems.

Rebuttal: While proof-of-stake systems have not yet reached the scale of networks such as Bitcoin's, there is no reason why they cannot do so in the future. Because there is a reduced barrier to entry and no specialist hardware is required to run them, proof-of-stake systems may have the ability to scale beyond what proof-of-work systems are capable of.

Coin consolidation

The most prominent argument against proof-of-stake systems is the concentration of coins among only a few validators. The structure of proof-of-stake encourages coin accumulation in order to maximize the likelihood of winning a block and getting a reward.

Token markets can be cornered by a wealthy entity, allowing them to collect the majority of tokens. Most proof-of-stake systems allow unlimited number of validators to be created by a single entity, and because there is little upfront financial investment to creating validators, someone who controls the majority of tokens might control the majority of the network.

As a result, the first distribution of proof-of-stake coins is critical. Some newer proof-of-stake coins sell tokens to investors before they are released to the public. In certain situations, token sales have accounted for 40% or more of maximum token supplies, giving venture capital companies and other early investors a significant edge in receiving network benefits over others.

Rebuttal: While proof-of-stake does select block makers primarily based on the magnitude of their stake, several blockchains are already implementing ways to limit the risk of centralization. Some are adding a degree of randomization to the selection mechanism, as well as considerations like “coin age,” or how long the investment has been kept. This ensures that stake size is not the main determinant of block formation and that smaller validators have a chance of winning.

Some blockchains have designed their systems so that validators who accumulate a certain number of coins begin to receive lower benefits. This encourages stakeholders to outsource their stake to smaller validators, allowing tokens to be distributed across more validators and boosting decentralization and security.

Less robust security

As previously stated, lowering the barrier to entry for network users can help raise validator count and, by extension, decentralization; yet, making it easier to join the network might also reduce its security.

To attack a proof-of-work network, a bad actor would need to buy enough gear to represent the majority of the network, and then pay to run it all. The two-tiered security strategy comprising upfront equipment expenses and ongoing energy costs makes network attacks less feasible. Proof-of-stake systems require only a small initial investment to participate, making them more vulnerable to attack.

The current hashrate of Bitcoin is almost 200 million terahashes per second. The S19J, Bitmain's top-of-the-line ASIC miner, can perform 88 terahashes per second. By that metric, only half of Bitcoin's network would require approximately 1.2 million of these devices. The current price of an ASIC is $10,390 per unit, which means it would cost almost $12.5 billion to buy enough miners to make up half of Bitcoin's network, only to pay exorbitant fees to run the machines.

To attack a proof-of-stake chain, such as Avalanche, a malicious actor would need to buy more than half the tokens (approximately $19 billion at current pricing) and set up enough validators to make up more than half the network (630 validators at Avalanche's current validator count). Because proof-of-stake validators do not necessitate expensive hardware or massive amounts of energy to operate, attackers incur only the initial cost of acquiring tokens rather than continuing energy expenditures.

Rebuttal: The initial upfront cost of attacking a sufficiently big proof-of-stake network is growing large enough that the lack of recurring expenses is gradually becoming unimportant. At today's rates, acquiring a majority interest in Avalanche already costs roughly $20 billion. The more popular these blockchains develop, and the more coin holders in a proof-of-stake network, the more difficult it is to attack them.

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