Differences Between PoW and PoS Consensus Mechanisms

To secure their network, major cryptocurrencies have adopted Proof of Work (PoW) and Proof of Stake (PoS) as the most common consensus mechanisms. In Bitcoin, PoW is used to validate transactions and secure the blockchain. This mechanism prevents double-spending and is secured by miners who use computational power to compete for the right to confirm new blocks and update the blockchain.

On the other hand, PoS is the most popular alternative to PoW and operates differently. PoS aims to address some of the limitations of PoW, including scalability issues and energy consumption. In this mechanism, participants are called validators and do not need to use powerful hardware to compete for the chance to validate a block. Instead, they need to stake (lock) the native cryptocurrency of the blockchain. The more coins staked, the higher the chance of being chosen as a validator. The network then selects a winner based on the amount of crypto staked, who will receive a proportion of the transaction fees from the block they validate.

Basics

Various consensus mechanisms are adopted by blockchain networks to ensure the validity of transactions. PoW, the oldest mechanism created by Satoshi Nakamoto, is considered by many as a safe option. PoS was created later but is now commonly used in most altcoin projects.

Proof of Work is not only used in Bitcoin but it has also been adopted by other major cryptocurrencies like Ethereum (ETH) and Litecoin (LTC). Proof of Stake, on the other hand, is utilized by Binance Coin (BNB), Solana (SOL), Cardano (ADA), and several other altcoins. It's worth mentioning that Ethereum shifted from PoW to PoS in 2022.

What Is Proof of Work and How Does It Work?

PoW is a widely-used consensus algorithm that prevents double-spending in various cryptocurrencies, including Bitcoin. Satoshi Nakamoto introduced PoW in 2008 in the Bitcoin whitepaper. Its purpose is to achieve distributed consensus on the blockchain network, allowing for peer-to-peer transactions without the need for intermediaries.

To verify transactions on a PoW network, participants called miners use substantial resources to ensure the network's security and correctness. These miners create and validate blocks of transactions by using specialized mining hardware to solve mathematical problems. The miner who first solves these problems earns the right to add their block to the blockchain and receive a block reward. This reward is made up of newly generated cryptocurrencies plus transaction fees. The amount of crypto in a block reward varies across networks. In the case of Bitcoin, the current block reward is 6.25 BTC plus transaction fees (as of 2020-2024). However, this amount reduces by 50% every 210,000 blocks, which occurs approximately every four years, due to the halving mechanism.

What Is Proof of Stake and How Does It Work?

PoS is a consensus algorithm that emerged in 2011 as a viable alternative to PoW algorithms, aiming to tackle the scalability limitations of PoW networks. PoS is now the second most popular algorithm used by cryptocurrencies, such as Cardano (ADA), Binance Coin (BNB), and Solana (SOL).

Despite having a shared goal of reaching consensus on the blockchain, PoS, and PoW have different approaches for selecting who validates a block of transactions. Unlike PoW blockchains, PoS blockchains do not require miners to compete for block validation rights. Instead, validators must have a specific amount of coins locked in a smart contract on the blockchain to become eligible to validate a block. This process is called staking. Depending on the network, the protocol selects a validator either randomly or based on their holdings. Validators receive transaction fees from the block they validated as rewards. Typically, the more coins a validator locks up, the higher their chance of being selected.

Differences Between PoW and PoS

The consensus mechanisms that secure the blockchain network, PoW and PoS, differ in how they determine who validates new transactions. A comparison between the two is provided below:

Is Proof of Stake a Better Solution?

The adoption of PoS by Ethereum in its ETH 2.0 upgrade has led to debates over its superiority to PoW. Supporters of PoS highlight its scalability and transaction speed benefits and claim that it is less harmful to the environment compared to PoW. However, proponents of PoW argue that PoS needs to prove its potential in terms of network security, given that PoW networks require significant resources, making them more expensive to attack. With the switch to PoS, anyone with at least 32 ETH can participate in staking and become a validator to receive rewards.

Risk of Centralization

The Proof of Work consensus mechanism requires miners to hash block data until a valid solution is found, which becomes more difficult and expensive as cryptocurrency becomes more popular. Miners may join pools to increase their chance of receiving the block reward. As of March 2023, the top four mining pools control 50% of the total Bitcoin hashing power. This concentration of power is a concern for some, as it reduces the decentralization of the network.

The Proof of Stake consensus mechanism replaces mining power with staking, allowing individuals to confirm transactions without requiring specialized equipment or a specific location. However, running a validator node can still be expensive. Users can stake tokens behind certain validators, similar to mining pools. Although Proof of Stake is easier to participate in, it can still suffer from centralization issues due to large validators controlling a significant portion of staked tokens. Despite these challenges, both PoW and PoS aim to maintain a secure and decentralized network.

Security Risks

The risk of a 51% attack is present in Proof of Work blockchains, where the top four mining pools control around 50% of Bitcoin's total hashing power. This kind of attack involves malicious actors or organizations gaining control of over 50% of the network's hashing power, potentially overriding the blockchain consensus algorithm, and committing malicious acts for personal gains, such as double spending or altering transaction records. Despite this risk, it is unlikely to happen on Bitcoin due to its large network.

On the other hand, a 51% attack on a Proof of Stake blockchain would require the attacker to own over 50% of the coins on the network, which could result in a rise in demand and coin price worth billions of dollars. However, this is also unlikely to occur as the value of the attacker's staked coins would decrease drastically if the network was compromised. Consequently, it is not very probable for a 51% attack to happen on a PoS blockchain, particularly one with a high market cap.

Disadvantages of Proof of Stake

Proof of Stake has been considered as an alternative to Proof of Work, but it also has its disadvantages. Validators with more staked assets have higher chances of validating the next block due to the reward distribution mechanism. Some people criticize this as it can lead to the "rich getting richer" and give them governance rights in PoS blockchains.

There are also security risks for smaller market cap crypto that uses PoS, as they are more susceptible to attacks. While popular cryptocurrencies like ETH are less likely to experience a 51% attack, smaller digital assets with lower value can be targeted. Attackers can acquire enough coins to gain an advantage over other validators and exploit the PoS system by becoming validators frequently. The rewards they earn can then be used for further staking and increase their chance to be selected in the next round.

Conclusion

It's difficult to determine which consensus protocol works better between Proof of Work and Proof of Stake, as they both have their advantages and disadvantages. While PoW is secure and reliable, it is also criticized for its high carbon emissions during mining. Ethereum has recently made the transition to PoS, which is seen as a more environmentally friendly alternative. As a result, new projects may increasingly prefer PoS in the future.