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Proof of Work (PoW) vs Proof of Stake (PoS): the guide

Proof of Work (PoW) and Proof of Stake (PoS) are two of the most popular consensus algorithms in the blockchain technology world. In the first case, it is impossible not to mention the bitcoin (BTC) protocol, or ethereum (ETH), whereas the Proof of Stake has been adopted by other cryptocurrencies.

Consensus mechanisms are procedures that take place within a distributed network and are used to reach an agreement between the various nodes on the implementation of the rules defining the network protocol. In this case, they are used to validate the transactions that have been carried out, but they can also be used to penalise those who decide to commit irregularities or those who do not respect these rules.

Protocols and consensus mechanisms

The terms consensus and protocol should not be confused with each other. The consensus is a software layer that ensures that the rules are properly respected. In the case of Bitcoin, Ethereum and other cryptocurrencies, it validates transactions, checks all signatures, checks the balances of the various addresses and, more generally, checks that the rules defined in the protocol are actually respected.

Two examples of consensus mechanisms are the Proof of Work (PoW) and the Proof of Stake (PoS).

The protocol, on the other hand, is the definition of the rules. Specifications and methods are declared that explain what needs to be done to make the whole network work. For example, Bitcoin or Ethereum can be defined as protocols.

The Proof of Work (PoW) consensus algorithm

As has already been explained, the PoW is a distributed consensus mechanism whose purpose is to ensure that the rules defined in the protocol are respected. In this situation, it uses what in jargon is defined as mining: very powerful computers try to solve a complex mathematical problem in order to find a solution and receive a reward for the work done.

Once this happens, the miners validate a block and add it to the blockchain, with the consensus of the nodes who must verify that the hash found by this computer is actually correct.

Why, however, should someone invest a large amount of funds to buy ad-hoc computers that can solve these problems? Simply because those who find this solution first receive (currently) 12.5 bitcoins (BTC), for a current value of $102,325.

Considering that 144 blocks are validated every day and 12.5 bitcoins (BTC) are extracted for each block, the amount at stake every 24 hours is about 14.7 million dollars, according to the current value of BTC on CoinMarketCap.

The Proof of Stake (PoS) consensus algorithm

The PoS works in a completely different way. The end result is always the same: validating the blocks and ensuring that they are actually correct, but the mechanism by which this result is achieved has nothing to do with what PoW does.

First of all, it is not a physical process, there are no supercomputers that perform very complex calculations by exploiting their own computational resources, but there are the so-called validators. The mechanism that decides which new blocks will be validated is based on the fact that the network participants will stake their own cryptocurrencies.

Generally speaking, although even in this case there are several variants, the more and longer a participant stakes their cryptocurrencies, the higher the probability that a participant will become a validator.

Proof of Work (PoW) vs Proof of Stake (PoS): pros and cons

The PoW requires dedicated and very expensive hardware. Moreover, more and more often there are updates from large manufacturers, such as Bitmain, which make the so-called ASICs more performing, pushing those who manage the mining farms to upgrade computers and thus to spend more resources.

Also from the point of view of environmental pollution, PoW is not the best choice: these computers consume a lot of power, it has been estimated that the consensus mechanism of Bitcoin consumes the entire energy used by the Internet in 2016.

The PoS provides a more secure network as cyber-attack attempts become more expensive. When considering, for example, the scenario in which an attacker wants to carry out a 51% attack, in the case of the PoS the market reacts accordingly by raising the price of the cryptocurrency, making it practically impossible to carry it out.

Unlike the PoW, in which the miners buy ASICs, or other dedicated hardware, in the PoS consensus mechanism the phrase “the rich get richer” is famous: given that the amount of cryptocurrencies staked strongly affects the probability of validating a block, and consequently receiving the reward, the more people stake large quantities of funds, the more likely it is that they will become validators, thus gaining a sort of priority over the other participants.

In addition, rules describing the functioning of these consensus mechanisms are put to the vote and those who stake more have more voting power. As a result, a small group of participants with a lot of cryptocurrencies would theoretically be able to alter the blockchain at will.