The two most popular blockchain consensus algorithms -Proof of Work (PoW) and Proof of Stake (PoS). What are their basics, how do they work? Who invented them? What differentiates Pow and PoS and what do they have in common? Which one is more secure and which one is more energy-consuming? Let's find out together.
Every blockchain network consists of interconnected computers spread across the globe and without a central authority overseeing or controlling their functionality. Each of these Computers which forms the network operates independently from but cooperatively with every other computer on the network.
These multiple computers that together forms the blockchain network are called nodes and TOGETHER all must AGREE on the validity of every transaction on the network. The process and systems through which this agreement is formed is called -Consensus Algorithm. They assure that the blockchain protocols or rules are being followed and guarantee that all transactions and mining activities occur in a trustless way.
Read more on what is a blockchain in this post >> Understanding the Blockchain and Cryptocurrency Technology [An Indepth and Non-Technical Explanation]
The consensus algorithms are a crucial element of every blockchain network as they are responsible for maintaining the integrity and security of these distributed systems. The first cryptocurrency consensus algorithm to be created was the Proof of Work (PoW), which was designed by Satoshi Nakamoto and implemented on Bitcoin.
There are several types of consensus algorithms. The most common are Proof of Work (PoW) and Proof of Stake (PoS). Both have their advantages and disadvantages when trying to balance security with functionality, performance and scalability.
Without wasting time, let's quickly dissect the two and learn everything about them as much as we can.
What is the Proof of Work (PoW) Algorithm?
This video by the Binance Academy explains it well. Please pay attention and watch it till the end.
The PoW algorithm was the first consensus algorithm to be created. It is employed by Bitcoin and many other cryptocurrencies such as ETH, ETC, Monero, Litecoin etc. and it is an essential part of the mining process.
The initial concept of Proof of Work was developed in 1993, by Cynthia Dwork and Moni Naoras but the term “proof of work” was coined by Markus Jakobsson and Ari Juels in a document published in 1999. The PoW is arguably the biggest idea behind the Nakamoto’s Bitcoin white paper – published back in 2008 – because it allows trustless and distributed consensus.
By trustless and distributed consensus system we mean that if you want to send and/or receive money from someone, you don’t need to trust in any third-party services -remember where we talked about doing away with the middle man in this post? good!
In 2009, Bitcoin introduced an innovative way of using Proof of Work, as a consensus algorithm. Since then, PoW has spread to become a widely used consensus algorithm and is now deployed by many cryptocurrencies after bitcoin.
The PoW consensus algorithm makes sure that miners are only able to validate a new block of transactions and add it to the blockchain if the distributed nodes of the network reach consensus and agree that the block hash provided by the miner is a valid proof of work.
In a PoW system, miners compete against each other in solving complex computational puzzles. These puzzles are difficult to solve, but when solved, the solutions can be quickly verified. So, once a miner finds the solution to a new block, they can broadcast that block to the network. All other miners will then verify that the solution is correct and the block will likely be confirmed.
Bitcoin is a blockchain-based system that is maintained by the collective work of decentralized nodes. Some of these nodes are known as miners and are responsible for adding new blocks into the blockchain. In order to do so, miners need to try and solve some highly complex mathematical problems which involves guessing a sequence of numbers (called nonce) by following a definite mathematical procedure - this complex process is referred to as mining. When a miner solves the complex mathematical problem correctly, the other nodes will verify the validity of the outcome and the miner node is rewarded with the block reward -which is 1 BTC in the case of Bitcoin.
Therefore, it is impossible to add a new block into the main chain without first finding a valid nonce, which in turn generates the solution of a specific block (called block hash). Each validated block contains a block hash that represents the work done by the miner, this is why it is called Proof of Work.
Proof of Work helps to protect the network against numerous different attacks (such as the infamous 51% attack). A successful attack would require a lot of computational power and a lot of time to do the calculations and therefore it would be highly inefficient since the cost incurred by an attacker would be greater than the potential rewards for attacking the network.
One issue with Proof of Work is that mining requires expensive computer hardware that consumes a large amount of power. And although this is what guarantees the security of the network, these mining calculations can't be used beyond that. That means all that effort and resources (electricity etc.) expended in adding a single block to the blockchain has no use after the block is mined plus every other miner's effort is wasted as only one node that produces the block is rewarded. This make the system to be considered as highly inefficient.
While Proof of Work may not be the most efficient solution, it is still one of the most popular methods of reaching consensus in blockchains. There are already alternative methods and approaches trying to solve the problems, but only time will tell what method will be the successor of Proof of Work.
One of such alternatives is the PoS approach.
What is the Proof of Stake (PoS) Algorithm?
The Proof of Stake consensus algorithm was introduced back in 2011 to solve the problems of the current most popular algorithm in use - Proof of Work. While they both share the same goal of reaching consensus in the blockchain, the process to reach the goal is quite different.
Staking is the action of locking crypto assets to secure the network, and being paid interest for doing so.
Proof-of-stake is a consensus algorithm that decides on who validate the next block, according to how many coins you hold, instead of miners cracking cryptographic puzzles using computing power to verify transactions like they do with traditional Proof-of-Work.
Simply put, the Proof of Stake consensus algorithm replaces the PoW mining with a mechanism that decides on who validate the next block, according to how many coins you hold or stake in the network. The validator of each block (also called forger or minter) is determined by an investment of the cryptocurrency itself and not by the amount of computational power one has allocated to the network.
Each PoS system may implement the algorithm in different ways (as we have different kinds of PoS -that's for another post), but in general, the blockchain is secured by a sequential and random election process that considers the node’s (miner or staker) wealth and the coins age (how long the coins are being locked or staked) are.
It’s good to note that in Proof of Stake systems, blocks or new coins/tokens are said to be ‘forged’ rather than mined. Cryptocurrencies using Proof of Stake often start by selling pre-mined coins or they launch with the Proof of Work algorithm and later switch over to Proof of Stake. For example the Ethereum blockchain is currently based on a PoW algorithm, but the Casper protocol will eventually be released to switch the network from PoW to PoS in an attempt to solve the network’s scalability issues and improve performance and speed.
Whereas, in the Proof-of-Work based systems more and more of the cryptocurrency is created as rewards for miners; the Proof-of-Stake system usually uses transaction fees as a reward.
Users who want to participate in the forging process, are required to lock a certain amount of coins into the network as their stake. The size of the stake determines the chances for a node to be selected as the next validator to forge the next block - the bigger the stake, the bigger the chances. In order for the process not to favor only the wealthiest nodes in the network, more unique methods are added into the selection process. The two most commonly used methods are ‘Randomized Block Selection’ and ‘Coin Age Selection’.
In the Randomized Block Selection method the validators are selected by looking for nodes with a combination of the lowest hash value and the highest stake and since the size of stakes are public, the next forger can usually be predicted by other nodes.
The Coin Age Selection method chooses nodes based on how long their tokens have been staked for. Coin age is calculated by multiplying the number of days the coins have been held as stake by the number of coins that are staked. Once a node has forged a block, their coin age is reset to zero and they must wait a certain period of time to be able to forge another block - this prevents large stake nodes from dominating the blockchain.
Each cryptocurrency using Proof of Stake algorithm has their own set of rules and methods combined for what they think is the best possible combination for them and their users.
When a node gets chosen to forge the next block, it will check if the transactions in the block are valid, signs the block and adds it to the blockchain. As a reward, the node receives the transaction fees that are associated with the transactions in the block.
If a node wants to stop being a forger, its stake along with the earned rewards will be released after a certain period of time, giving the network time to verify that there are no fraudulent blocks added to the blockchain by the node.
The stake works as a financial motivator for the forger node not to validate or create fraudulent transactions. If the network detects a fraudulent transaction, the forger node will lose a part of its stake and its right to participate as a forger in the future. So as long as the stake is higher than the reward, the validator would lose more coins than it would gain in case of attempting fraud.
In order to effectively control the network and approve fraudulent transactions, a node would have to own a majority stake in the network, also known as the 51% attack. Depending on the value of a cryptocurrency, this would be very impractical as in order to gain control of the network you would need to acquire at least 51% of the circulating supply.
The main advantages of the Proof of Stake algorithm are energy efficiency and security.
A greater number of users are encouraged to run nodes since it’s easy and affordable. This along with the randomization process also makes the network more decentralized, since mining pools are no longer needed to mine the blocks. And since there is less of a need to release many new coins for a reward, this helps the price of a particular coin stay more stable.
Of course I'm sure by now you already have a fair understanding of the PoW and PoS algorithms. However this post will not be complete without a shoulder to shoulder examination of the two approaches; so let's critically examine the differences between the PoW and PoS.
PoW and PoS Compared
Without much ado, as I believe by now you already have a perfect understanding of the PoW and PoW consensus frameworks; for the sake of some who might not have watched the video explanation above for any reason (I highly recommend you do) let's take a look at this info-graphic made by Blockgeek comparing PoW and PoS systems and highlighting their key differences and unique features.
That sums it up. So if I may ask, which of the two do you prefer?
Summary and Conclusion
It’s good to remember that the cryptocurrency industry is rapidly changing and evolving and there are also several other algorithms and methods being developed and experimented with.
PoS consensus has risen in prevalence significantly over the last several years among public blockchains looking to improve Bitcoin’s underlying performance execution. Such blockchains can support more applications and transactions. Examples of these innovative PoS variants includes but not limited to: delegated PoS, Leased PoS, and others that have emerged to meet specific network demands.
Ethereum, the high-profile smart contracts platform and the second largest cryptocurrency (by market capitalization), is currently in the process of transitioning from PoW consensus to PoS to better supplement the network’s performance demands. Other networks, like Cosmos, an interoperable blockchain network (can connect, communicate and relate with other blockchains seamlessly), is live and one of the first full-scale PoS implementations to go live in the industry.
PoS also gives validators and network node operators a greater opportunity to participate in consensus compared to PoW based blockchains like Bitcoin. The low barrier to entry, which requires just holding a specific number of tokens, is appealing to users who do not wish to sink so much money into expensive ASIC hardware for Bitcoin mining.
Overall, PoS has been gaining significant momentum in the rapidly evolving cryptocurrency space. Its long-term sustainability among public blockchains is still yet to be proven, but it has widespread support among many industry experts, participants, and observers because it is better suited for higher performance and increased transaction speed.
So which do you consider as a better alternative -Pow or PoW? Please let us know in the comments below.