Proof-of-Stake vs. Proof-of-Work: A comparative study

In the era of virtual currencies, blockchain technology has helped make transactions more secure, by recording the details after they have been confirmed. A number of clients or “validators” confirm the transactions, in order to overcome the reliability issue between the nodes of a peer-to-peer network that supports the digital currency. Despite the availability of alternative consensus algorithms, the most widely adopted algorithms are the Proof of Work (PoW) algorithm and the Proof of Stake (PoS) algorithm. 

A comparative study of unique consensus algorithms currently used in modern blockchain technology is presented in this article. In the following analysis, we will discuss the consensus mechanism, rewards of those who mine or verify blocks, and the new security risks that exist within the algorithm itself. A presentation of the basic characteristics of algorithms and the cryptocurrencies used will also be given. We will conclude with a discussion of future trends in consensus algorithms for blockchains. 

A Breakdown Of What Blockchain Is

This is a delightful invention of Satoshi Nakamoto which keeps information in a shared database that is easily verifiable and is not confined to any single place. In this technology, no central hub can corrupt the information used to verify an individual’s identity, and no hacker can corrupt any of the transactions connected to it. 

Having a blockchain eliminates the danger of data being stored centrally and has no single point of failure because there are multiple identical blocks across the network. As a system built upon public and private “keys,” the blockchain has always worked without error since the invention of bitcoin in 2008. In order to solve the problem of double-spending, Satoshi Nakamoto introduced proof of work (PoW). As a result of its efficiency and security improvements, blockchain technology has disrupted virtually every industry. 

A blockchain uses two main algorithms: PoW (Proof-of-Work) and PoS (Proof-of-Stake) and involves some decisive factors for deciding whether to invest in a coin. The speed, applications, and consensus algorithms of blockchain are some of the significant features to understand. We will compare and discuss PoW (Proof-of-Work), and POS (Proof-of-Stake) here.

Proof-of-Stake vs. Proof-of-Work: A comparative study

A Non-override Appraisal Of The POW And POS Consensus Algorithm

PoW:  Blockchain networks use Proof-of-Work, which ensures that users are able to verify transactions and add new blocks to the chain by sending digital tokens to each other. All miners or validators take part in this algorithm, which rewards validity and confirmation of each transaction carefully on the network. Using a distributed ledger, the network’s verified transactions are collected into blocks and arranged as needed. Mining is a way to do this. It is a protocol used to prevent cyber threats like distributed denial-of-service attacks (DDoS), which send a large number of incorrect requests to drain computer resources.

What is the process of PoW?

In order to discover digital coins, miners and validators have to perform complex mathematical calculations. Having successfully verified the transaction, the new block is then stored on the blockchain, a distributed ledger, and thus creates a new block group. Mining has two important aspects; one is validating a transaction, and another is creating new cryptocurrency through the work of the rewarded validators. Consequently, it may attract new miners since individuals who succeed at the task first are rewarded with the new cryptocurrency. A mining process also enhances network computing power and computation, making it harder for a single miner to mine a coin, and thus more expensive and difficult.

During the process of creating a transaction, a number of events occur:

  1. Each transaction is recorded in a block.
  2. A miner validates each transaction in a block.
  3. During mining and validation, miners solve a mathematical problem called proof-of-work.
  4. In each block, the miner/validator is rewarded for the first transaction resolution.
  5. Public blockchains are created with transactions that have been verified.
What is the process of PoW?
Photo credit: intellipaat.

Mining follows inverse hashing, where the block information has to be hashed in such a way that it is below the threshold (complexity) so that it is less difficult to find numbers (nonces). This threshold is the amount of effort, computation, and time necessary to create a new block. Thus, mining becomes more efficient for the miner. A new block is generated every 10 minutes during this update, which occurs almost every 14 days. In order to increase the security of the network, miners put in all the effort and receive rewards for this. In the blockchain, the proof-of-work process allows the old blocks to be protected from being altered.

PoS: A proof-of-stake algorithm is another consensus algorithm with the exact same intent as a proof-of-work algorithm, other than the fact that transactions are validated by a distributed network. Proof-of-stake is determined by its wealth known as stake. Stakes are currency sums that are locked up for a certain period of time. The unit of cryptocurrency is not rewarded for validating and confirming transactions within a block in POS, instead, miners receive transaction fees for the tasks they accomplish. A PoS system uses stake and looks at the number of cryptocurrencies in the blockchain, instead of expending too much effort, energy, or compute power to create new blocks like a PoW system.

In What Way Does PoS Work?

Generally, Proof-of-Stake is inversely proportional to the size of the network and the number of stake participants. In a scenario where a large number of people stake the coin, then fewer rewards will be awarded. Users who keep more cryptocurrencies for a longer duration will be rewarded with a more generous transaction fee, however, all users will have an equal say in the transaction process to avoid monopolization. Keeping a substantial amount of money for a longer period of time will earn you more interest as this concept works similarly to the fixed deposit offered by banks.

PoS allows creators to be selected based on their wealth, or stake, which is a number of coins. An individual who adds a new block in order to validate the transaction is known as a forger. In creating a new block, the forger stakes their coins and validates the transactions afterward. Furthermore, they can lose their stake and their authority to proceed if a fraud transaction is confirmed by a validator.

In this case, a forger has to be selected to forge the next block. How to choose the right forger is as follows: 

  1. Using a random selection method– The user whose hash value is the lowest and whose stake is the largest will select the next block.
  2. Using coinage as a selection criterion – An older coin indicates a more experienced forger.

A Comparison Of PoW and PoS Consensus Algorithms

A key component of blockchain technology is the use of proof-of-work and proof-of-stake consensus algorithms. Bitcoin, for example, is commonly used as a proof-of-work cryptocurrency and Ethereum is a proof-of-stake cryptocurrency.

The blockchain Consensus and its impact

There are two main advantages to blockchain technology. They are decentralization and immutability of records. It is the consensus mechanism that determines the value of crypto assets. Verification of ledger information is ensured by this mechanism, and DDoS attacks between nodes are prevented. This prevents double-spending (of the same cryptocurrency twice) and ensures the next blocks added to the blockchain have the latest valid transactions. The continuous forking mechanism helps to prevent network interruptions.

Forking Mechanism
Forking Process,   Photo credit: amazonaws

With different consensus methods, the perspective is the same, but the process is different. Each consensus mechanism differs in the way it represents and rewards the verification of transactions.

PoW algorithm:

In 1999, Markus Jacobson created the Proof of Work algorithm. The blockchain collects every transaction in pools called mempools, where miners verify them. Using the cryptographic hash value of the previous block, bitcoin users request transactions, which are then verified by the miner. Because the previous block’s hash value is hidden, a miner has to keep trying different numbers to find it. Upon discovering the previous block hash, the miner declares it to the network for verification and creates a new block. In the event that the first miner solves this mathematical problem using massive computing power, he will be rewarded with bitcoin.

In a mine, the miners are faced with problems of the following types:

1: While asymmetrical problems can be difficult to decipher, their resolution is relatively easy for the network to approve.

2: No skill is required to solve these puzzles, they require brute force, which consumes a large amount of computation power.

3: A mining operation will become more complex if its block time exceeds that of the parameters.

PoS algorithm:

There is a distinct difference between PoS and PoW algorithms. For transaction confirmation in PoS, a set of nodes stakes their own digital coins. A staker who can deposit more funds and wait for a longer time will have a better chance of winning the transaction validation. With PoS, there is no need to mine as in PoW, since the underlying computation power and complex work have already been provided by the network. If the validators have more stakes in the blockchain, they can add blocks more frequently.

Validators and participants will be chosen according to the number of stakes they own. PoS utilizes an architecture known as ‘sharding’. In this process, the horizontal parts of the network are stored in separate groups. Its limitation is the monopoly of the PoS and the ‘Nothing at Stake’ attribute. Major stakeholders of the network perceive PoS algorithms as being inefficient because of monopoly. The ‘Nothing at stake’ case often leads to more conflict, as there can be more forks and conflict if there are more unique chains in the blockchain. In the PoW algorithm, this kind of problem doesn’t occur.

A Comparison Of Consensus Algorithms PoW and PoS

CryptoCurrency

PoWPoS
Bitcoin, Ethereum, Bitcoin Cash, Bitcoin SV, Litecoin, Monero, Zcash, Decreed, and many others.BlackCoin, Peercoin, Nxt Coin, NEO,
PIVX, Reddcoin, QTUM, OkCash, NAV Coin, Stratis etc.

Immutability

PoWPoS
In terms of immutability, it is the best. Approximately 10 minutes are needed to mine a block. A block becomes hard & costly to alter once 144 blocks (in 24 hours) have been mined and it becomes concretely definable after mining 1000 blocks (within a week).Immutability is not possible. The Proof-of-Stake algorithm generates a block immediately instead of waiting for a new block signer to be selected.

The Cost, Energy, and Resource Triangle

PoWPoS
A massive amount of energy is required for this algorithm. There is no energy requirement for this algorithm
It is extremely expensive to build a PoW network.
As a result of the lower power consumption, the cost of this process is negligible
For mining, Application Specific Integrated Circuits (ASICS) machines are required, but the cost is too high.There is no need for expensive computer equipment

The Centralization Of Power

PoWPoS
PoW is highly vulnerable to centralization. In the mining industry, significant operations are widely popular.Proof-of-Stake systems could provide a viable
resolution. The amount of space a participant can occupy in the network depends on the stake they hold.

Reward

PoWPoS
The miner gets rewarded if he or she can perform the work.Validators and stakers are rewarded for maintaining their stake for a certain period of time.

Potential vulnerabilities

Vulnerabilities ConsensusDetailed description
A selfish mining attackPOWThe attacker determines which blocks to mine, and then destroys the other miners' resources
Bribe AttackPOSIn the attack chain, the attacker uses a secret chain to gain confirmations after the transaction has been made. In light of a new blockchain, the transaction is reversed
51% AttackPOW AND POSA large portion of mining power is controlled by attackers, making it impossible for other miners to complete blocks.
PoW SystemThe network requires 50%+ computation power at high cost.
PoS System This is a relatively low cost process, but you must achieve a currency exchange rate of 50%+
network

What Is The Future Of Blockchain: PoW or PoS

The influential cryptocurrency Ethereum has led to the evolution of PoS over PoW. The Ethereum blockchain platform has become the most important for application developers. As Ethereum cryptocurrency becomes more successful, PoS algorithm’s popularity will increase. In order to accomplish a single goal via various consensus mechanisms, PoS and PoW are two completely different processes. Neither one is likely to succeed unless it addresses a specific problem. It is the crypto community that will decide on the safety of blockchain networks based on the capabilities of the algorithms, and only time can decide on the most acceptable consensus algorithm for blockchain networks going forward.

Final Thoughts

Consensus mechanisms for blockchains have been implemented most recently through PoW and PoS. The PoW algorithm is implemented in a variety of cryptocurrency schemes and is strongly verified. As a rule, blockchains have PoW algorithms that are unlikely to be attacked by DDoS. Although highly energy-intensive, it has expensive computational power, will become increasingly centralized, and transaction throughput will be low, so future adoption will be challenging. In contrast, a PoS system does not require as much computing power, and the reward depends on the duration and amount of the stake. PoS’s major advantage is its scalability and transaction throughput, but its security is not much better than decentralized PoW’s.

Having been enhanced to prevent attacks if the number of coins increases, the blockchain is now more secure. Coins become more expensive, prohibiting the purchase of a large number of coins. In PoS, the Casper protocol prevents stakers from performing invalid transactions. Stakes are immediately removed by the protocol if the staker is found guilty and further stakes are also stopped. However, despite their significance in cryptocurrency transactions, the differences in their approaches make them controversial. Comparing consensus algorithms reveals the competitive nature of their adoption.

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