The Blockchain Consensus Dilemma — PoS vs PoW

October 18, 2022
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The Blockchain Consensus Dilemma — PoS vs PoW

Considering decentralization as one of the main principles of the blockchain, ordinary network users can take part in the approval of each new block: not everyone but those who were selected by special consensus algorithms, such as Proof-of-Work and Proof-of-Stake. Both of these algorithms were implemented at different times in Ethereum (first — PoW, then — PoS), and have some distinctive features. Below we propose you consider our Proof of Work versus Proof of Stake comparison to understand pros and cons of each of these solutions.

What is Consensus in Blockchain?

Consensus in blockchain is the algorithm that is responsible for verifying transactions and confirming that they were executed correctly.

In practice, this algorithm determines under what conditions decentralized network nodes (physical computers on which the blockchain is based) reach an agreement on the current state of the data in all blocks.

Thus, the consensus confirms the addition of new blocks, ensuring that the rules of the certain blockchain are respected and all transactions performed within it are valid, as well as maintaining the integrity and security of the network.

The two most popular consensus algorithms are Proof-of-Work and Proof-of-Stake. These two consensus algorithms are very similar, however, we can identify a key difference: Proof of Work uses a competitive verification method to confirm transactions and add new blocks, while Proof of Stake selects for these network participants who perform emission. Let’s look at the PoS vs PoW comparison in more detail below.

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Proof-of-Work (PoW)

Proof-of-Work (PoW) is a consensus algorithm that was first introduced on the network of the first Bitcoin cryptocurrency. It was first presented to the public in 1993 outside the context of the blockchain: in particular, a few years later it formed the basis of the Hashcash algorithm, which protects email from spam. In 2004, its scope expanded: PoW began to be used for electronic currencies. Four years later, in 2008, this algorithm was applied to Bitcoin, and some time later, it was used as the basis for other notorious blockchains: Litecoin, Ethereum, Dash, Dogecoin, Monero, etc. By the way, Ethereum switched to PoS later, and why this happened, we will talk further.

As for the implementation of this algorithm in practice, it happens as follows: to confirm transactions, network nodes solve certain mathematical problems (hash functions) that require high computing power. According to a predetermined algorithm, the hash function performs the transformation of an arbitrary array of input data into a string of a specified length. The transformation procedure is called hashing, and its result is called a hash.

At the same time, the node that found the solution first receives a kind of reward — new coins. This process is called mining, and it is mining that protects the blockchain from possible threats. The degree of protection is due to the complexity of the above mathematical problems (because if they were too simple, the network would be susceptible to hackers).

Thus, PoW provided resistance to cyberattacks for the first blockchains. Let’s look at the more benefits of this consensus algorithm in detail:

high security. Attacking a blockchain based on Proof-of-Work is extremely expensive, because in this case, the hacker needs to get more than 50% of the computing power in the network;

proof by time. Despite the shortcomings that will be discussed below, this algorithm continues to be chosen by large blockchains thanks to its stability;

protection against cyberattacks performed on low-power equipment. An ordinary person cannot handle the Proof-of-Work mathematical problem, since these problems are originally designed for hardware with large computing power that can do it quickly;

true decentralization. Proof-of-work provides a more decentralized way of validating transactions (in comparison with Proof-of-Stake) as it requires more physical nodes within the network.

However, with the popularization of cryptocurrencies, their users and developers began to notice significant shortcomings that hindered the further development of these blockchains. In particular, we are talking about the following disadvantages of PoW:

mining is not environmentally friendly and requires enormous computing resources. The nodes that perform complex calculations are competing entities. At the same time, most of them work for their owners in vain, since only one of them receives a reward, but consumes enormous amounts of energy (mining only bitcoin requires resources commensurate with the energy costs of some small countries). For the same reason, miners are pooled, which, in turn, reduces the level of security;

finality issues. Due to the peculiarities of transaction finality, most PoW blockchains are susceptible to cyber threats such as selfish mining and 51% attack.

commissions for verifying transactions are quite high. The more transactions the network performs, the higher the fees. In the case when users need to transfer a small amount of money, the fee may even exceed it;

transaction speed and scalability aren’t top-notch. Blockchains based on PoW are quite slow. They also cannot boast of high performance (in many cases it is only 7–10 transactions per second), which makes it impossible for them to be widely used.

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Proof-of-Stake (PoS)

Proof-of-Stake (PoS) is a consensus algorithm first introduced in 2011. The main goal of its creation was to eliminate the main disadvantages inherent in the PoW consensus: low speed and poor scalability.

A year after the presentation, this consensus was integrated into the PPCoin (PeerCoin) blockchain, and later — into Cardano, Binance Chain, IOTA, TRON, and Ethereum (by the way, Ethereum developers decided to do this one of the last — in 2020).

So, how does Proof of Stake work? Unlike PoW, PoS does not need mining, in which network participants solve complex mathematical problems. Instead, new blocks are added only if the users “prove” their ownership of the cryptocurrency of a particular blockchain. Nodes in PoS-based blockchains are called validators, and the more cryptocoins a node has in a crypto wallet, the more likely the network will choose it to confirm the next block (staking) and accrue rewards.

At the same time, staking requires certain financial investments from the validators: in particular, they must have the minimum allowable amount of cryptocoins in their crypto wallet (in terms of US dollars, sometimes this amount reaches several tens of thousands of US dollars). In addition, these savings have to be frozen in the wallet for several months (that is, the validator does not have to spend them). Another mandatory condition for validators is to make the appropriate computer settings and ensure its continuous access to the network.

Thus, in PoW vs PoS comparison, PoS has three better characteristics both for the developers and end users:

it is more energy-efficient. This algorithm needs less power consumption and does not require flagship models of ASICs and GPUs;

it has higher speed and scalability. PoS provides its users with significantly higher speed and scalability: up to several thousand transactions per second;

it has transaction finality. In the context of PoS, finality means that past transactions can never change;

its transaction fees are low enough. PoS-based decentralized platforms have much cheaper transaction fees than those based on PoW.

As for the disadvantages of PoS, they are as follows:

safety problems. PoS is a less reliable algorithm compared to PoW, because since there is no need to solve complex mathematical problems, network participants can purchase most of the tokens (over 51%) to control the addition of new blocks to the blockchain;

not true decentralization. the validators with the largest number of crypto coins in their crypto wallet become the head of the network and take responsibility for approving all transactions occurring within it. Therefore, in this case, the true decentralization promised by the blockchain concept is no longer worth talking about;

not eco friendly enough. Even though PoS does not require mining, it cannot be considered absolutely eco-friendly. The fact is that to add another block, all the nodes that are responsible for the consensus must be online. Thus, network nodes must remain on and connected to the internet 24/7.

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Comparative Table of PoW and PoS

Now let’s highlight the general criteria for evaluating both algorithms and formalize the difference between Proof of Work and Proof of Stake in the form of a table.

Conclusion

Blockchain technologies evolve constantly, so it is not surprising that over the years more and more advanced and perfect consensus algorithms will appear. However, at present, both of the above types of consensus can meet the needs of the target audience of blockchains where they are applied, which means that their disadvantages are quite offset by the appropriateness of their use.

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