In a world where cryptocurrency is becoming more and more popular, people are looking for new ways to invest their money. Two of the most common types of investment are through Proof of Stake or Proof of Work. Both have their own unique benefits, but which one is better? In this article, we will compare the two systems and help you decide which one is right for you.
The most important thing to consider in the PoS vs PoW debate is their purpose.
What is PoW ?
Proof of Work was proposed by Satoshi Nakamoto for Bitcoin in 2009. It is a system that requires miners to solve complex mathematical problems in order to validate transactions and earn rewards. The first miner to solve the problem is rewarded with cryptocurrency and the transaction fees associated with that block. This process requires a lot of computational power, which is why Proof of Work systems are often called "mining" systems. This system is secure because it makes it difficult for anyone to tamper with the blockchain. However, it also requires a lot of energy and resources to operate.
Proof of Work is a consensus protocol that requires the work done by a miner to be verified. It involves using expensive mining rigs and computing power in order for this proof to occur, which makes it very difficult for malicious actors.
To summarise, PoW solves the distributed consensus problem for secure decentralised ledger. It is a protocol that guarantees one-CPU-one-vote. It helps protects against Sybil attacks and works by making a network useful enough to secure itself with economic rewards.
What is PoS ?
Proof of Stake was first introduced in 2013 as an alternative to Proof of Work because it requires less computational power. It is a system that allows users to earn rewards by holding onto their coins. In Proof of Stake, miners are chosen based on the amount of coins they hold. To add a new block to the blockchain, the miner must have a certain number of coins in that cryptocurrency. This process is called "forging" or "minting. This system is more efficient than Proof of Work because it does not require as much energy or resources. PoS aims to serve two purposes: securing the network and acting as a means of secure decentralised consensus on a ledger. Having said that, it is believed that PoS is less secure because it is easier for someone to attack the blockchain if they have a large number of coins.
PoS was created as a means for secure decentralised consensus on a ledger. Proof of Stake is not a protocol that guarantees one-CPU-one-vote. It's been proposed by many cryptocurrencies including Ethereum, NXT and BitShares as well as crypto coins such as Ripple and Peercoin
How are PoS and PoW different from each other?
Let's take a closer look at how both protocols work and how they differ from one another. As discussed earlier, both PoS and PoW are used to reach a distributed consensus. The difference lies in their algorithm.
Proof of Stake, also known as coin age, works by users putting up some of their currency (the stake) as collateral to verify transactions. High-staking users then have a higher probability of signing the next block and receiving transaction fees as a reward.
Proof of Stake currencies tend to be less inflationary than Proof of Work currencies (in particular because there are no mining rewards) which have a tendency to cause more supply in addition to demand leading to volatility.
Cost and Efficiency...
A Proof of Work (PoW) system (or protocol, or function) is an economic measure to deter denial of service attacks and other service abuses such as spam on a network by requiring some work from the service requester, usually meaning processing time by a computer.
Proof of Work solves the issue of double spending within a peer-to-peer network, where it prevents resources being spent more than once by requiring a Proof of Work. This Proof of Work is a piece of data that requires a lot of computational power to find the solution, but this process is easy to verify within the network. Mining or hashing power represents all resources spent on finding the solution. Here, "miners" solve computationally intensive mathematical puzzles in order to add new blocks to the blockchain and confirm transactions. The majority is needed to ensure continuity, so after 2009 with Bitcoin's release, mining quickly became a highly competitive business. It is said that due to large amounts of computing power needed, bitcoin mining today consumes more energy than a number of developed countries.
As time passed and larger scale emerged in this industry, powerful mining hardware was designed that run faster than ever before. This advancement in technology led to the development of "Asic" mining hardware which surpassed any home-made server farm's processing power by multiple magnitudes.
Now, Bitcoin is no longer mineable by an average person with home computers, and most bitcoin mining operations are large enough to be considered industrial scale.
In simpler words, Bitcoin mining today is a business that requires expensive equipment and a lot of electricity to be profitable. This in turn led to bitcoin centralization where a few pools account for most of the network hashrate distribution, pretty much like in any other industrial activity.
Proof of Work's purpose was decentralization via cheap and plentiful computing resources. This goal was achieved and the network is running well: it's robust, cost effective and secure.
The problem is that by design Proof of Work requires a lot of electricity which increases the price of each transaction while limiting mainstream adaptation. Also, since bitcoin maximalists claim that one day all financial transactions will be on the blockchain, it is more than obvious that this style of mining will not fulfil future needs.
Proof of Stake is an alternative to Proof of Work which shifts the computational load from miners/nodes in the network to stakeholders/nodes in the network. It's important to note that while both involve stakes, the two are entirely different.
In order to create a more sustainable alternative to mining as a form of securing the blockchain and preventing double spending within the cryptocurrency network, it could be more effective to use Proof of Stake (PoS) as a means of creating the next generation blockchain. As mentioned before, it works by having miners "stake" their coins to secure the network. The higher the staking power, the higher chances a miner has to add a new block and claim its reward.
This protocol is less energy consuming which makes it more cost-effective for mainstream use, but there's a catch: the downside of this system is that if 51% of the network staked their coins, then they could in theory collude to double spend or prevent transactions from being confirmed. It is in this sense where Proof of Stake and Proof of Work differ: in PoS, you can't mine by yourself. You need to stake with a pool or delegate your staking power to a trusted third party that will keep the network secure for everyone.
Proof of Stake exploits the fact that the more you own, the more you are incentivised to remain honest in the network.
Proof of Stake requires less electricity and time for block creation, but there still needs to be some form of cost to discourage bad actors from attempting to attack the network. It does not require mining software or specialized hardware to be able to participate, making it unfair to say that Proof of Stake is only for the rich. Proof of Stake is not a consensus mechanism by itself, but rather an addition on top of an existing consensus protocol. This means that it still requires miners and validators to produce and validate blocks within the network using some validation mechanism.
Proof of Work cannot be gamed, whereas Proof of Stake systems are not as secure against cartels, hence why they require additional security mechanisms such as penalties and incentives for decentralization.
The question is, which is better?
Both Proof of Work and Proof of Stake protocols have their own cons and pros, although Proof of Work has a proven security model. This means that it is more secure in decentralization and cartels forming since they are not required to pay for their own hardware but establishing consensus through electricity consumption can be expensive for miners without subsidies.
Proof of Stake, with all its advantages, also has its own set of issues such as 'nothing at stake' problems. However, developers are working on mitigating these issues by adding additional security measures in PoS systems such as penalties and incentives for decentralization to make it harder for cartels to gain more than 50% of the consensus.
So, in a nutshell, Proof of Work security comes from mining economics and infrastructure development, whereas Proof of Stake allows internal stakeholders to vote on blocks that are valid or invalid. In theory, it is more secure since internal stakeholders are incentivized to not attack the network themselves. However, in practice, it is much less secure due to low decentralization and cartels forming in Proof of Stake systems that can control enough nodes to do double spending attacks.
Although there are a lot of issues with both protocols, neither has been compromised yet and they both will continue to be used in the cryptocurrency ecosystem.
So, which system is better? It depends on your individual needs and preferences. If you want a more secure system that requires more energy and resources, then Proof of Work is the way to go. If you want a more efficient system that doesn’t require as much energy or resources, then Proof of Stake is the way to go.