Proof-of-work (PoW) and proof-of-stake (PoS) are the two main types of consensus algorithms used by most blockchain-based cryptocurrency platforms to verify transactions. Digital currency transactions are broadcasted on a blockchain network, which usually consists of a large number of computing machines and an immutable distributed ledger.
Competing To Validate Blocks, Verify Transactions
The distributed ledger is referred to as a blockchain, and it contains a permanent record of all transactions that have been successfully processed on a cryptocurrency network.
In order to verify a transaction, the full-node operators of a cryptoasset platform have to come to a consensus regarding the authenticity of a transaction. Sets of transactions, or multiple transactions, are grouped into blocks and all the nodes participating in a cryptocurrency network compete for a chance to validate each block.
Validating blocks is a competitive process because the network nodes that are selected to verify transactions are rewarded with transaction processing fees and/or newly minted digital currency. Full-node operators on most cryptocurrency networks have to expend their personal resources in an effort to potentially be chosen to validate a block.
Block Validators: PoW Miners vs PoS Forgers
In PoW-based networks, a block validator is called a miner because they use their computing resources (electricity and computer hardware machines) to solve complex mathematical puzzles. The first miner on a PoW-based cryptocurrency platform to solve these difficult math problems and validate a block of transactions is rewarded with newly created digital currency and transaction fees.
In comparison, on a PoS-based cryptocurrency network, there is no mining process and block validators are called forgers. In order to have a chance at being selected to validate blocks on a PoS-based crypto platform, a forger must stake their coins/tokens, or digital currency.
PoS: Forgers With Lowest Hash Values Given Preference
The forgers who stake larger amounts may have a better chance at being selected to validate a block, however other factors are also taken into consideration when choosing block validators on a PoS-based crypto network. For instance, forgers who have the lowest hash values (used to record transactions on a blockchain) have a better chance of being selected to verify transactions.
But this may not be one of the criteria used to choose a block validator on all PoS-based crypto platforms. Many PoS networks also select forgers based on the duration of time each user has staked their coins or tokens. Users who’ve staked for the longest time period may be given preference when selecting the most eligible block validator.
Which Offers Better Security, Efficiency, & Is More Effective?
So which consensus algorithm, PoW or PoS, is better at securing a cryptocurrency network? Also, which algorithm works more efficiently (in terms of resources) and effectively when it comes to ensuring network security and selecting the most eligible block validators?
One of the most frequently cited advantages of a PoS-based system over a PoW network is that the former is more energy efficient. That’s because there is no energy-intensive mining activity involved in validating blocks on a PoS network.
Proponents of PoS also argue that the economic incentives for forgers are more aligned with their commitment to the network’s native cryptocurrency. For example, in a PoW-based network, a miner may not initially own any of the coins they are mining, and may only be motivated to validate blocks so that they can earn as much digital currency as possible.
In comparison, block validators in a PoS-based system have to actually support the cryptocurrency in which they are rewarded. In other words, forgers must have a stake in the network, which means they must actually own the digital currency they are verifying.
Ethereum’s Planned Transition From PoW To PoS
When comparing PoS and PoW, one of the primary differences between both consensus mechanisms is that in the former there are no block rewards. Most PoS-based crypto platforms create the total amount of digital currency in the beginning, and the maximum coin supply usually does not change. However, there are well over 1,000 cryptocurrencies and it’s possible there may be some versions of PoS that may issue more coins after their genesis block has been produced.
As mentioned, there are no block rewards in PoS crypto networks, but the forgers are compensated (TX fees) for helping to verify transactions. As crypto enthusiasts know, Ethereum’s developers are planning to switch from PoW to a PoS-based network consensus protocol (for Ethereum). One of the main problems with PoW is that it consumes a fairly large amount of electricity.
Bitcoin’s Energy Consumption Estimates
According to Digiconomist’s Energy Consumption Index for Bitcoin, the world’s largest PoW-based network (index also reportedly includes electricity consumed by Bitcoin Cash (BCH) network), the flagship cryptocurrency is currently consuming about 47 TWh of electricity annually. Significantly, 16 “US households [can be] powered for 1 day by the electricity consumed for a single [bitcoin] transaction.”
Although others have reported much lower estimates for the total energy consumed (per year) by the Bitcoin and Ethereum network due to mining, the developers of Ethereum may be considering switching from PoW to PoS because it’s considered a more eco-friendly and a cheaper way of achieving distributed consensus. However, Bitcoin Core developers are strictly against using PoS, claiming the protocol is not secure (among other problems).
If/when Ethereum’s developers decide to activate Casper, which is Ethereum’s version of PoS, then a validation pool will be created. In order to be selected as a forger, users will be required to join this pool. This will be done by calling the Casper contract and sending a certain amount of ether (ETH). As explained by Ethereum co-founder Vitalik Buterin: “There is no priority scheme for getting inducted into the validator pool itself; anyone can join in any round they want, irrespective of the number of other joiners.”
Subject to change, Buterin had said the reward for each transaction validator, after Casper goes live, will be “somewhere around 2-15%” per annum. Going on to explain other details, the Russian-Canadian programmer wrote in a Reddit post (a year back): “You automatically get inducted [into the validator pool] after some time. You can leave by sending a special kind of message; you leave the validator pool after some time, and then you can call another function after ~4 months to get your money back, plus rewards (or, if you got slashed, you get nothing).”
Many Implementations Of PoS
While there are many other blockchain-based digital asset platforms that also use the PoS consensus mechanism – as Peercoin was the first cryptocurrency to implement PoS in 2012 – we have focused on Ethereum in this article. The Nxt platform also uses PoS, however, it’s ongoing development has slowed down considerably since it was launched in late 2013. Other cryptocurrencies such as BlackCoin, Nav Coin, Qora, among others use/used PoS as well but their platforms have not been adopted by a significant number of users.
EOS, Tron (TRX), and a few other major cryptocurrency platforms use a variation of PoS called delegated-proof-of-stake (DPoS) which we shall discuss in a future post on CryptoInsider. In later posts, we shall also go into security-related issues involving both PoS and PoW. As CryptoInsider reported, San Francisco-based exchange Coinbase found that Ethereum Classic’s (ETC) PoW-based security was compromised. A bad actor was reportedly able to take control of a large amount of ETC’s hashrate in order to launch a 51% attack.
Coinbase’s management had stopped ETC deposits and withdrawals as they claimed that the hacker(s) was exploiting the Ethereum Classic network by engaging in double spending. While some argue that it can be prohibitively expensive to launch 51% attacks on PoW networks, such attacks were increasingly carried out on smaller cap coins last year. There are also some security-related problems that are found in PoS networks which we shall discuss in another post.