Key Difference between Proof of Work (PoW) and Proof of Stake (PoS)

• PoW or proof of work is a special protocol that aims to deter cyber-attacks such as DDoS, whereas Proof of stake (PoS) is a type of consensus mechanism which is used to validate transactions on the blockchain.
• PoW is the original cryptographic consensus mechanism originating long before PoS, while PoS was derived from PoW, but it comes with several improvements.
• Comparing PoW vs PoS, The PoW requires powerful and up-to-date mining hardware, the PoS requires a server-grade unit for efficient processing.

Proof of Work (PoW) vs Proof of Stake (PoS)

What is PoW?

PoW or proof of work is a special protocol that aims to deter cyber-attacks such as DDoS (distributed denial-of-service attacks), which can use up the resources of a computer stem with the help of multiple fake requests. It uses a trustless and distributed consensus system.

PoW implements a decentralized system and works without needing a central authority. The PoW consensus mechanism can verify transactions without needing a third party. PoW makes double-spending difficult by proving that every user has done several computations. Many other blockchain projects that copied the original Bitcoin code also follow the Proof of Work model.

What is PoS?

Proof of stake (PoS) is a type of consensus mechanism which is used to validate transactions on the blockchain. It works by allowing cryptocurrency owners to stake their coins. This gives them the right to verify new blocks of transactions on the blockchain and add them to the network.

The model of Proof of Stake exists as an alternative consensus mechanism. Few cryptocurrencies follow this protocol which replaces miners with stakes. The algorithm chooses any one of these stakers to publish the next block. Two developers named Scott Nadal and Sunny King created PoS noticing the flaws in PoW in the year 2012. Limited scalability and needing a lot of electricity are not a problem in the PoS model.

Proof-of-Work (PoW) vs Proof-of-Stake (PoS)

What is Staking?

Staked funds are set aside and stored in a smart contract by validators. This is known as the staking process. Whoever has a bigger stake might be chosen to verify transactions and create blocks. Blocks thus forged get added to the blockchain. All pos coins do not follow the same set of rules even though the concept of validation is the same. Every qualified validator market participant earns a reward based on ownership.

How Does PoS Work?

In theory, PoS is an “ideal” solution for scaling problems within the PoW mechanism. Ethereum 2.0 will be 100% proof-of-stake. Hence it will process its transactions, NFT transactions, and execute smart contract transactions. One must have a powerful computer system and a sufficiently sized wallet. It increases their chances of earning a proof-of-stake reward.

The PoS model handles maintaining integrity within a blockchain. It also guarantees that crypto users cannot mint coins without earning them.

PoS consensus mechanism concept is based on the following steps:

Step 1) Users who own native tokens of a blockchain store all or a part of it in staking pools safely.

Step 2) The algorithm pseudo-randomly chooses the next validator in line.

Step 3) The chosen validator has to propose a block and the number of transactions in it.

Step 4) Other participants get to approve and verify the proposed transaction.

Step 5) A new block is added to the blockchain.

Step 6) The selected validator earns a transaction fee.

How Does PoW Work?

How Proof Of Work Works

Proof of work requires an expensive computer calculation or, in other words, the process of mining. Mining needs to be performed to create trustless transactions on the blockchain.

Step 1) Transactions are compiled and bundled up together in the form of a block.

Step 2) Miners then verify transactions within each block, checking to see if they are legitimate.

Step 3) Miners then solve a mathematical puzzle known as a proof of work problem to proceed. All miners have to compete.

Step 4) The first miner who solves each block problem is rewarded.

Step 5) The verified transactions are then stored on the blockchain.

Advantages of PoW

Some Important benefits/pros of Proof of Work are:

• Proof-of-Work was invented to stop double-spending attempts.
• It is one of the most secure consensus mechanisms.
• Cryptos based on PoW have more mining power and are more secure.
• Mining earns rewards in a typical PoW model.
• Proof of work is random yet fair.

Advantages of PoS

Some Important benefits/pros of Proof of Stake are:

• The PoS mechanism is safe from 51% of attacks.
• The Proof-of-stake does not need expensive hardware for processing.
• Transactions are faster and relatively inexpensive.
• Processing in the case of PoS does not use much energy.
• Stakes act as a financial motivator in the PoS model.

Disadvantages of PoW

Some important risks/cons of Proof of Work are:

• Mining requires extremely powerful hardware.
• Not affordable for every market participant.
• Energy consumption due to extremely high mining participation is off-the-charts.
• The majority of mining pools are controlled by single entities.
• PoW model is prone to 51% attacks

Disadvantages of PoS

Some Important risks/cons of Proof of Stake are:

• PoS models have not been implemented on an elaborate blockchain.
• Capturing control of the network is easy as it depends on capital.
• PoS misses out on many PoW benefits, such as mining rewards.
• Centralized threats like double-spending are executable.
• PoS has governance issues meaning users with more tokens can change the rules of the network.

Proof of Work Examples

Proof of work model has existed for a long time so let us go through some examples of PoW.

Emails

The first example we shall explore is emails attached with a lengthy piece of text. Ordinary computers can send millions of emails per day, but executing other tasks and receiving a lot of spam can affect its efficiency and reduce processing costs. PoW is used to lower processing cycles by providing complex computation problems which enhance security.

Cryptocurrencies

One of the most famously used examples of PoW is mining a cryptocurrency. The PoW model ensures that miners have direct authority within the network. It also prevents double-spending attacks from occurring. Miners have a fixed income because PoW includes enough headers in new blocks.

DDoS

Another example of PoW is migrating DDoS attacks that cause inconvenience and disruptions. The PoW algorithm solves complex mathematical problems by getting a collective solution. PoW helps to solve problems in a distributed sort of way. This way, even a small number of participants can solve complex problems.

Proof of Stake Examples

Proof-of-Stake is the so-called better way of solving cryptographic problems. Following are a few cryptocurrencies that use the PoS model that is faster and more secure than PoW.

Ethereum 2.0:

The co-founder of Ethereum, Vitalik Buterin, proposed the Ethereum Improvement Proposal in 2016. It uses a modified version of the PoW algorithm called Sharding. The concept of Sharding can improve network performance by holding more hash power. Sharding would also increase the number of transactions in a block.

How are transactions verified: PoW

Understanding how transaction verifications work in PoW can be difficult without an example. Let’s look at Bitcoin’s model.

Step 1) Within every 10 minutes or so, a new block is created. It takes about the same amount of time to confirm Bitcoin transactions as valid.

Step 2) Every single block contains different transactions that require verification. Within a decentralized system, it becomes difficult and energy-consuming to verify every transaction.

Step 3) Proof-of-Work offers a huge amount of computational power to solve the cryptographic algorithm. It makes it impossible for network participants who have fewer resources to get better rewards.

Step 4) Once all transactions within a block are verified, they are added onto the public blockchain where other users can see them.

Let us suppose the mathematical sum 4+8 using Proof of Work. Now we know that the answer is 12. But in this model, whoever gets to the answer first wins the mining reward. Imagine miner 1 and miner 2 competing to solve this problem. The results would be as follows;

Miner 1

Attempt 1: 4+8 = 11 *Incorrect*

Attempt 2: 4+8 = 9 *Incorrect*

Attempt 3: 4+8 = 10 *Incorrect*

Miner 2

Attempt 1: 4+8 = 13 *Incorrect*

Attempt 2: 4+8 = 12 *Correct*

Attempt 3: 4+8 = 14 *Incorrect*

So you can see that miner 2 guessed the correct answer on 2nd attempt so that it will get the miner reward. But in reality, computers can execute millions of combinations each second.

At any particular moment, many hardware devices are trying to solve cryptographic equations. It is almost like a race to be the first to reach the finish line and get the mining reward.

The process is a little different in the case of any PoW coin other than Bitcoin, as expected from second and even third-generation cryptocurrency projects developed to fix the issues present in Bitcoin.

How are transactions verified: PoS

Compared to the Proof of Work model, the Proof of Stake model uses different processes for transaction confirmation and reaching consensus. While it also uses a cryptographic algorithm, the objective is quite different.

In the case of Proof of Stake, the creation of the next block is based on how much an individual stakes. The stake is based on the number of coins a user possesses for the specific blockchain they’re attempting to mine.

Technically speaking, the participants aren’t mining here but “forging”, as there isn’t a block reward to be attained. Unlike Bitcoin, cryptocurrencies which use PoS reward the participants by rewarding them with the transaction fee.

To begin the staking process, users must first deposit coins into a specific wallet, which freezes the coins, allowing them to be used to stake the network. Most PoS blockchains have a minimum coin requirement to start the staking process, which involves substantial upfront investment.

Example of PoS verification:

To better explain the PoS process, let’s take the example of Dash(DASH). The minimum requirement is 1000 DASH, which would, at one point(December 2017) would have been equivalent to $1.5 million.

Step 1) First, you have to decide the number of coins you want to stake to generate some rewards from PoS.

Step 2) Find out the total number of coins n circulation in the blockchain. In our example, it has 1000 coins in circulation.

Step 3) You then have to purchase and stake 100 coins, which is 10% of the coins in circulation.

Step 4) You are now ready to receive the staking rewards. According to this example, you have a ten percent chance of winning every reward on the blockchain.

Proof of Work Vs Proof of Stake (PoW and PoS) – Key Differences

With a detailed understanding of proof of work and proof of stake consensus algorithms, it is possible to reflect on the differences between them. The comparison of PoW and PoS can help in finding a reliable answer to ‘Is proof of stake better?’ for developing efficient solutions for desired use cases. 

• Working 

The first pointer for comparing proof of work and proof of stake algorithms would obviously refer to their working. Proof of Work is undoubtedly one of the oldest consensus algorithms. PoW involves bundling a group of transactions in a mem pool, and miners have to verify validity of transactions by solving a cryptographic puzzle. So, ‘what is the difference between proof of stake and proof of work?’ when it comes to their working.

As compared to proof of work, the Proof of Stake or PoS algorithms do not rely on mathematical puzzles. On the contrary, the algorithm selects validators randomly according to their stake in the network. Proof of Stake algorithm does not involve the creation of any type of coin, especially with all coins created from the start. 

• Energy Use

The next critical factor for differentiating between PoW and PoS consensus algorithms refers to energy efficiency. Proof of Work consensus algorithms focuses on identifying the user who could modify the ledger by leveraging a competitive race. Participants in the race or miners have to use computational energy for proposing valid blocks that follow the network rules. 

On the other side of the PoW vs PoS debate, Proof of Stake presents better scope for energy efficiency. However, PoW miners have the flexibility for using any type of energy sources such as wind, hydropower and other sustainable energy sources. PoS mechanisms would need specialized hardware and an active internet connection with heavy energy expenses. 

• Security 

Among the many factors for deciding the better alternative between PoS and PoW, security would obviously take foremost priority. As a matter of fact, the answer to ‘Is proof of stake more secure than proof of work?’ could present a decisive impression. Before comparing PoW and PoS on the grounds of security, it is important to understand that PoS is comparatively new. 

In the event of forking in PoW-based blockchain systems, miners must focus on the actual blockchain or shift to the new blockchain fork. Constant forking can present a formidable economic disadvantage, and proof of work consensus discourages constant forking. 

On the other hand, Proof of Stake consensus does not impose restrictions on forking. Participants don’t have to increase their stakes for validating transactions on multiple copies of a blockchain. As a result, validators don’t get any additional incentives for validating transactions on multiple copies of blockchain. In addition, newly emerging PoS protocols such as Casper showcase the need for validators to make minimum deposits for participation. 

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• Rewards

The comparison of proof of stake vs proof of work would also focus on the factor of reward distribution. Which consensus mechanism serves a better fit for miners? In the case of PoW consensus, block reward is the new token awarded to the miner for each valid block accepted in the network. 

The block reward reduces after discovery of a specific number of blocks for maintaining the total money supply in a finite and deflationary state. Interestingly, the term ‘block reward’ holds the same meaning in the case of PoS consensus. However, the validators in PoS cannot get any block reward, and they get only the transaction fees or network fees as their reward.

You can find an overview of the answer to ‘what is the difference between proof of stake and proof of work?’ in the following table.

Final Words

The Proof-of-Work model has become an unfair system where common participants have no chance of getting the mining rewards. But the same is not true for proof-of-stake, where everyone gets an equal opportunity to become a forger and get rewards.

Due to the advantages mentioned above, Ethereum is preparing to convert into PoS in its 2.0 version. The release of ETH 2.0 is due next year.

Ethereum developers and communities have always supported a decentralized and transparent ecosystem. Seeing how potential hackers are taking advantage of the proof-of-work model, it is clear why Ethereum and other crypto projects are favoring the proof-of-stake mechanism.