Proof of Work vs Proof of Stake: is there a space for both?
- Direct comparison: proof of work vs proof of stake
- Will PoS succeed in displacing PoW?
- Is there a place for the PoW protocol in the world of environmental activism?
- The effect on PoS and PoW platform operators and user experience
- Case study: Ethereum’s future switch from PoW to PoS
- Final thoughts
Proof of work is still secure in its status as the consensus algorithm used by the most popular cryptocurrency networks. However, in recent years, some blockchains have made some attempts to switch between the systems, as Ethereum has from PoW to PoS. Ethereum’s plan is to completely migrate towards proof of stake until 2022, which will help with the network scalability. And new blockchains are mostly PoS and its variations or upgrades.
By comparing proof of work and proof of stake protocols, we will try to glimpse into the future and see the prospects opening up before PoS and PoW in the coming years.
Direct comparison: proof of work vs proof of stake
To help you better understand the difference between the two protocols, I will make comparisons from different points of view, such as blockchain ordering, energy use, participation, and reward distribution.
Blockchain ordering
A blockchain refers to the chain of blocks that consist of transactions. The first block is called the genesis block, and the following blocks are lined up behind. Every following block refers to all the previous blocks, so the double spending of coins is not possible.
Proof of work ordering
Because miners in PoW cryptocurrency blockchains such as Bitcoin are committing computing power and thus burning energy, they compete to add the next block to the blockchain.
Because of the longest chain rule, there is no certainty that the last block that was added into the blockchain is final. There is still a possibility that another miner can add two consecutive blocks faster than others, which will make the previous block invalid. Then, one chain becomes longer than the previous one. So, in the case of Bitcoin, miners must wait for at least 6 confirmations, i.e., for 6 blocks to be added, which makes the transaction final.
Proof of stake ordering
Being one of the closest alternatives to proof of work protocol, PoS sorts the blocks one after another chronologically, similarly to PoW. But there is no need for any physical efforts like the energy-intensive mining process, nor is there any competition between miners in PoW or validators in PoS. Because the proposing selection process doesn’t take as long as 10 minutes, like in the Bitcoin network, but rather 1 to 2 seconds, just necessary for creating a new block and proposing it through the network, the finality is faster and takes a few seconds instead of dozens of minutes.
Energy use
When Satoshi Nakamoto first created Bitcoin, he probably didn’t expect how big this thing would become, and what huge energy consumption it would require. Large farming halls full of ASIC miners using hashing functions and motivated to earn a reward in BTC are scattered all over the world. The idea of self-mining on your laptop is already outdated.
PoW energy use
It’s a major point of difference between proof of work and proof of stake protocols. Miners are solving complex mathematical functions (called hashing) to find a random number, nonce, to get the right to create a new block and add it into the blockchain. This process is done by specialized ASIC hardware machines, and due to the reason that miners have hundreds upon thousands of them to win the race for each block, it is a very energy-intensive operation.
Nowadays, the energy consumption of Bitcoin alone, and that’s not counting any other PoW networks, is comparable to the middle-sized country like Norway or Argentina. If Bitcoin were a country, its consumption would be in the top-30 of the world! According to researchers from the University of Cambridge, BTC’s yearly energy consumption reaches about 121 terawatt-hours (TWh).
But I wouldn’t consider it a waste, and rather say that this technology secures the cryptocurrency blockchain itself. And according to this Cambridge report, 39% of hashing’s total energy consumption comes from renewable energy. That can be proved by using software that is being developed right now by Crypto Climate Accord. So, while Bitcoin would still require a lot of energy, it could be clean energy from wind or solar power plants.
PoS energy use
In PoS networks, there is no competition based on energy consumption for proposing a new block. But still, PoS miners need to maintain their computers and internet connection active all the time, which consumes some energy.
Compared to PoW, PoS cryptocurrency blockchains need much less energy, so it’s cheaper to run the network. But for pool operators and validators, it’s still profitable, because there is a much higher throughput of transactions, and even with a lower fee for a transaction, those who run the network still receive a fair reward. Currently, it seems that there are no PoS alternatives in terms of sustainability.
Participation
PoW participation
To participate in the PoW networks, users need to purchase very expensive mining hardware. The larger the investment, the higher chance of creating a new block.
So, it’s a big advantage for players already running their mining machines, or even those who have access to new technologies and updated versions of ASICs or GPUs used for mining in PoW networks.
PoS participation
In PoS, all users who hold a particular token can participate in a consensus algorithm. In a network with lower barriers, everyone can become a validator or block producer. Projects that are using staking pools like Cardano or Polkadot enable users to simply delegate their tokens to some staking pool or a validator with a solid reputation, and that’s it.
The entry conditions for staking pools or validators in PoS networks are such that users need to own a specific number of tokens and lock them for some time as a stake. Validators can lose the staked amount as a punishment when they use any malicious techniques such as double-signing or coordinated attacks on the network.
Reward distribution
PoW reward distribution
In the Bitcoin network, miners receive a reward for each block mined. This reward consists of transaction fees and a fixed price for a new block. However, this amount is reduced by half once every 4 years after a certain number of blocks has been mined in an event called halving, which is included in the source code of the Bitcoin protocol.
Thanks to halving, Bitcoin’s inflation is decreasing and lowers over time. When, someday in the future, it reaches 0% all 21 million coins will have already been mined.
As a consequence of halving the number of coins used for rewards, Bitcoin’s price doubles, or the transaction fees increase, otherwise, miners won’t be able to extract any profit and will shut down their hardware. This happens due to the fact that the block size is settled up, and upgrades like Schnorr signatures can improve present TPS, but that won’t be enough for the growing number of users.
Ethereum’s throughput is 25 TPS at this moment, but once PoS will be implemented and sharding finalized, allowing for hundreds upon thousands of transactions per second in the network.
PoS reward distribution
PoS networks reward users that propose a valid block into the blockchain. The rewards differ from blockchain to blockchain. Some consist of just the transaction fees, others have a special intensive budget for the first couple of years until the network is run-in and with a sufficient number of transactions whose fees cover the costs of the validator.
The degree of inflation or deflation in PoS coins is different for each protocol, and on-chain governance can even change over time, so I won’t dig into this topic more than is necessary for this article.
While in PoW only miners get rewarded by the new coins and transaction fees, in PoS, any user can get a benefit, even those who don’t participate in the consensus themselves or enter any stake pool, and also those just HODLing their coins in their wallets. This is why the distribution of tokens is fairer in PoS.
Will PoS succeed in displacing PoW?
Let’s start with a look into history. Proof of stake originated way before proof of work. PoW was conceived as a better version of PoS because it enabled protection against DoS attacks and spam. The PoW as we know it dates back to 2008 when Satoshi Nakamoto released the Bitcoin whitepaper.
Functional implementation of PoS, which improved PoWin in some ways, was introduced in 2012 by cryptocurrency Peercoin. Since then, the technology behind PoS has been safely upgraded many times by researchers and developers.
In the PoW vs PoS evaluation, we need to look at the use case of each algorithm as well, for example, large numbers of smart contracts are better to do with PoS cryptocurrency blockchains.
Once the blockchain can solve the so-called blockchain trilemma of scalability, security, and decentralization, it can become a mighty answer to PoW networks that lack scalability.
If the network with a well-secured cryptographical lottery can solve the selection of the new block proposer, it would take seconds compared to Bitcoin’s 10 minutes. Then PoS blockchains will start overperforming those using PoW, which can enable a very limited throughput of transactions. And by increasing the number of users, the scalability on the first layer of Bitcoin and other PoW blockchains that have excellent security will be more and more problematic. This is where I see the success of PoS cryptocurrency blockchains.
Is there a place for the PoW protocol in the world of environmental activism?
Mass adoption of crypto is affected by environmental activism mainly since Bitcoin and other PoW networks are highly energy-intensive, an unquestionable truth whether to secure the network, or even take into account the right of each individual to spend the energy for which they have paid as they wish. Just take a look at Elon Musk and his frequently changing opinion on crypto. First, he announced that the company had purchased crypto, and Tesla would start accepting bitcoin payments for their cars. Next, he stepped back and refuted his statement saying this wouldn’t happen until Bitcoin miners start using solely renewable energy for mining.
As for the possibility of both algorithms coexisting, I think it doesn’t make much sense to compare PoW to PoS.
Some moves and solutions could solve this negative environmental aspect of crypto once for all. The technological growth of the blockchain industry results in higher energy consumption, but it can be extracted from renewable sources such as wind or solar energy instead of coal and oil. Once this turnaround starts happening, the masses will definitely change their opinion and agree that crypto has moved in the right direction.
Will we still have to wait for another two, or even five years for this transition to renewables? Most likely, but that doesn’t matter. The most important thing here is to spread the word and step on the path towards the goal of making crypto planet-friendly and drowning out the arguments of cryptocurrency opponents.
At the moment, I see no need to abandon PoW cryptocurrency blockchains. In the worst-case scenario, an outflow of fundamentally weak users and investors from crypto will occur, and I can live with that. I believe that there is space for both PoS and PoW coins in the future.
The effect on PoS and PoW platform operators and user experience
If we take a look at PoW vs PoS in terms of transaction scalability, PoW can’t compete on the first layer at all. The finality of transactions in minutes or dozens of minutes in comparison to the one in seconds is a significant handicap in the usability of the coins.
Sure, for large transactions that don't disrupt the time frame, PoW blockchains are applicable. But for decentralized finances or trading platform users, where the time of execution plays a big role, especially in case of intense price volatility, that is a huge limitation.
Arbitrage opportunities, various types of cryptocurrencies on different exchanges, all require fast execution and finality of transactions. It’s understandable that even platform operators add some time reserve to be sure that the transaction is final, otherwise the problem of double-spending arises.
Technological improvements of proof of stake networks improve the user experience on crypto exchanges, and I am all for the idea to implement more and more PoS cryptocurrencies rather than those using the PoW consensus algorithm.
Case study: Ethereum’s future switch from PoW to PoS
With an increasing number of users, Ethereum has been experiencing scaling-related problems, something that increases the transaction fees. Given that one block can hold about 15 transactions per second, which is not a lot for a network that is a platform for many fungible and non-fungible tokens, smart contracts, decentralized applications, and generally serves as a base for DeFi movement.
One of the solutions from previous years is to increase the block gas limit which indicates how many transactions will fit in the block. However, this wouldn’t be a final solution, and we will have to wait for the implementation of the new version of Ethereum: Ethereum 2.0, often also referred to as Serenity.
The main change from version 1.0 is the transition of the consensus algorithm from PoW to PoS and no longer depending on mining on specialized hardware devices but opting for specialized validators-approved transactions. The move will increase the throughput and save a lot of energy.
The second significant change is the so-called Shard Chains the operation of the network would be distributed across which will make it possible to process orders of a way larger number of transactions and, as a result, reduce the transaction fees.
It is uncertain whether all the complex phases of the v.2.0 transformation will be implemented if the creators want to make it within the expected timeframe by 2022, or even later. However, if they achieve success without major complications and delays, the entire crypto world will take a step forward. The number of transactions per second will increase from several dozens to a few thousand, and, in combination with the second layers, easily to hundreds of thousands.
PoS and PoW: final thoughts
All in all, the PoW vs PoS showdown is thrilling to observe. The final goal of a successful blockchain network should be finding a compromise-free solution to the so-called blockchain trilemma, the triangle with the three vital characteristics at each of its peaks: security, decentralization, and scalability.
It is highly unlikely that you would use your coins worth thousands or millions of dollars in a network that is not secure to use, isn’t it?! Security is a cornerstone without which no blockchain can succeed.
The risk of a low decentralization level is also a serious concern. In centralized networks, one entity or group of big players can have a major impact on the further direction. At the whim of a leader of some centralized network, your funds may end up being frozen, or you could lose the option of moving them. That is a serious threat.
If no harm happens knowingly, a single point of failure (SPOF) is also a security issue..
If we imagine that these two triangle peaks are solved, scalability comes on stage. You might have secured and decentralized a blockchain, but without a solid level of scalability, it will be too hard or too expensive to use.
In my eyes, PoS is the natural evolution of PoW, because it solves the scalability issue PoW networks are notorious for, especially at the time when the number of new users is increasing significantly. Bitcoin, being the first PoW network, may have met the demands of its thousand users, but now, with millions of newcomers that want to send their tokens all over the planet, the scaling problem needs urgent attention.
I am watching the Ethereum transition to the 2.0 version, and am excited whenever news and bits of technological information are released. Let’s hope that the upgrades will go smoothly and without undue delay because, in my opinion, this transition will have long-lasting effects of great importance.
Will Bitcoin move towards PoS as well? I don’t think there is a need for it at the moment, which is especially true if we take into account that the developers are leaning more towards the conservative side compared with those in other projects. Bitcoin is the first cryptocurrency owned by the people, and it would make perfect sense if the system waited to see how Ethereum’s difficult upgrade goes. But — never say never. We’ll see what the future holds for the proof of work vs proof of stake rivalry.