PoW vs PoS: Key Differences Explained

PoW vs PoS: Key Differences Explained

The “Proof of Work versus Proof of Stake” debate has been going back and forth since the second one appeared on the market. Of course, both networks have their pros and cons. However, they have proved to be the best solutions for distributed systems to reach a consensus.

To understand the difference between Proof of Work and Proof of Stake, you must first get familiar with the concept of blockchain consensus. We have recently published an entire article covering this topic in depth - it will help you better comprehend the information we are to discuss in this piece. 

Now let's expand your knowledge on the two (2) largest consensus models in the crypto space and learn the difference between mining vs staking!

Proof of Work Explained

So, what is PoW? - Proof of Work is the oldest consensus mechanism ever known. In fact, it's older than crypto itself - PoW was invented in 1993, and Bitcoin launched in 2009. It was Satoshi Nakamoto who incorporated the algorithm into digital money. Before that happened, Proof of Work was a solution to prevent email spam. Ironically, it never actually did that job. 

How Does Proof of Work Work?

According to this consensus algorithm, miners compete with each other using computing power to find a solution to complex cryptographic problems. When miners successfully add a block to the blockchain, they receive a reward. For example, the current reward for generating one block equals 6.25 BTC. However, as more blocks are mined, the payout decreases. Millions of computers worldwide are guessing a hash, a 64-digit hexadecimal number, which serves as a key to opening a new block in a blockchain. Blocks can be thought of as containers that store transactional data that miners have to validate to ensure the proper functioning of the blockchain technology, thus earning the reward. The hashes are absolutely random and unpredictable. 

What’s more, every time a block is generated, cryptographic puzzles become even more complex to slow down the mining process. So, the logic is simple here: the more work miners put in, the more chances of winning a reward they have. Consequently, to put in more effort, you should acquire more computers, which leads to enormous energy consumption - the most criticized PoW side effect.

The Proof of Work algorithm has stood the test of time and is proven to be the most trusted and secure algorithm ever. If someone wants to attack a Proof of Work blockchain, they should take over 51% of all the network's computing power. The task is unrealistic, given the size of blockchains like Ethereum and Bitcoin.

Over the years, companies developed specialized computers called application-specific integrated circuit machines (ASICs). An ASIC is optimized to guess lots of hashes as fast as possible. As a result, mining cryptocurrency with an ASIC rig outperforms using personal computers with GPU cards. However, one ASIC can sometimes cost $6k, much more than a home computer. 

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Source: https://ecos.am/en/asic-shop#/

A more technologically advanced model can hit your wallet for $22k.

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Source: https://www.jasminer.com/#/productDetail/ede43d179f33465e9534c00a9ee601b8

Notable PoW Coins

Approximately 59% of the total cryptocurrency market capitalization falls on the PoW sector.

Bitcoin, without any doubt, is the first digital asset that comes to mind when talking about a Proof of Work cryptocurrency. The coin made its debut in 2009 and has undergone several ups and downs since then, but it still has the motherlode in market share.

The second-largest cryptocurrency, Ethereum, initially built upon Proof of Work consensus protocol before it switched to Proof of Stake in September 2022. That historical transition procedure, also known as "The Merge," has taken years to complete. The Ethereum Foundation claims that The Merge cut Ethereum's energy usage by ~99.95%.

Other notable cryptocurrencies that are based on the PoW consensus mechanism are Litecoin, Monero, Dogecoin etc. 

The complete list of PoW-based cryptocurrencies can be found here.

Proof of Work - Advantages:

  • Security. The network is getting bigger every second, which makes it more difficult to attack.
  • Easy to implement compared to Proof of Stake. Another reason why the majority of today’s cryptocurrency is based on PoW.
  • As opposed to PoS, PoW is easier to implement. PoW has lower maintenance requirements for the software using this consensus model. In addition, the maintenance algorithm enables firms to conduct audits in a more simplified manner.
  • Blocks are verified in a decentralized manner.

Proof of Work - Disadvantages:

  • High energy usage. In 2019 miners were responsible for consuming almost 0.2% of global energy. The most recent study by Arcane Research analyst Jaran Mellerud showcased that under the most optimistic scenario, mining will consume 0.36% of all global energy (894 TWh per year) in 2040.
  • Advanced hardware is pricey and quickly becomes outdated.
  • Low transaction speeds with high fees.

Proof of Stake Explained

When a system fails, it often leads to the creation of a new method of doing things. PoW failing gave birth to PoS. 

Proof of Work was solo in crypto for two years when Pos hit the scene. Then, in 2011, a user named QuantumMechanic proposed Proof of Stake as the alternative to the Proof of Work model.

Pow_vs_Pos_4

Source: https://bitcointalk.org/index.php?topic=27787.0

Peercoin was the first cryptocurrency that partly implemented PoS. Most Peercoin were minted through staking, while miners picked up the rest using the original Proof of Work mechanism. 

How Does Proof of Stake Work?

Proof of Stake operates on the principle of locking up cryptocurrency coins as a way to validate transactions. To become a node, people should stake a predetermined amount of coins that serve as collateral and assurance validators make to prove their honest commitment to the network. 

Under PoS, the right to add a block is a lottery - the more coins you lock up in your wallet, the more tickets and thus chances of winning a reward you have. In the case of Proof of Stake, reward means transaction fees. 

The PoS system has the same level of security as PoW - the network is safe unless someone controls 51% of all the computing power. In theory, if somehow a hacker managed an attack, the attacker would lose a large portion of their stake due to "slashing." Initially introduced by Vitalik Buterin, the " slashing " reward and penalty mechanism discouraged nodes' malicious activity by destroying a share of their staked assets.

Notable PoS Coins

Even though Peercoin adopted PoS in 2011, the Proof of Stake model didn't gain much traction until 2014, when Vitalik Buterin introduced "slashing," Jae Kwon published the Tendermint whitepaper. After that, Daniel Larimer launched BitShares, the first Delegated Proof of Stake blockchain network.

The most popular platforms that deployed PoS are Ethereum (ETH), Cardano (ADA), Algorand (ALGO), Tezos (XTZ), and Cosmos (ATOM).

The full list of PoS-based cryptocurrencies can be found here.

Proof of Stake - Advantages:

  • Energy sustainable. PoS requires less computing power than PoW.
  • More scalable. Faster transaction speeds make it plausible for the masses to adopt 
  • Access to financial products - anyone can become a validator when they delegate proof of stake to the pool. 

Proof of Stake - Disadvantages:

  • Concentrated wealth. Nodes with larger holdings are more likely to win rewards making 
  •  them more and more powerful.
  • “Nothing-at-stake” problem. Unlike in PoW, PoS validators can potentially vote for multiple forks floating around the network and reap the rewards from all of them for no additional cost. This process severely jeopardizes the integrity of each chain and can lead to a double spending attack.
  • Taxes. In most countries the assets you earn via staking get taxed as a capital gain.

Staking vs Mining: Side-by-side Comparison

Obviously, both consensus mechanisms have their strengths and weaknesses, and we explain the critical differences between PoW and PoS in the table below. 

Pow_vs_Pos_5
PoWPoS
CompetitionA node with more computing power has a better chance  of winning a reward.A node with the largest stake has the best chance of winning a reward.
RewardsBlock validators are rewarded with cryptocurrency.Block validators are rewarded with network fees.
DecentralizationMining pools make PoW mining centralized.PoS favoring nodes with larger amounts of stake make the system centralized.
SecurityAttackers need 51% of the hashing power to gain complete control over the network.Attackers must  stake 51% of total cryptocurrency supply to take over the network.
Energy intensityPoW's power consumption exceeds any other consensus mechanism in the crypto space.PoS is way more energy efficient compared to PoW.
Transaction speedEthereum can process up to 20 transactions per second.Ethereum 2.0 can process up to 100,000 transactions per second.
Forking issueThanks to the nature of PoW, forks are resolved automatically, mitigating the risk of a double spending attack.The PoS system doesn’t resolve forks by itself. In fact, it encourages validators to mint on both chains, which makes the network vulnerable to double spending attacks.

Transaction speed

When it comes to transaction speed, PoS-based blockchains are the ultimate winners. Most Proofs of Stake crypto projects are a thousand times faster than most Proof of Work ones. Just take a look at the picture below to grasp the difference between the TPS of the fastest PoS and PoW blockchains:

Pow_vs_Pos_6

Can you imagine that while the PoW miner generates 1 block, 10,000 PoS blocks are minted? There is a technical explanation for this.

Because a big portion of the hashing power goes to guessing random numbers and not validating transactions, PoW cryptocurrencies are very slow. In contrast, PoS blockchains are way more efficient and can process up to 100,000 transactions per second.

Forking

How does PoW address the forking issue?

When a fork occurs in PoW-based blockchains, it's in all the nodes' best interests not to mine on both chains simultaneously. To generate 1 block, miners have to spend X kWh of energy, so to generate 2 blocks on the forks, miners will have to spend 2X kWh of energy. There is no sense for network validators to continue mining on both chains. Under PoW, the forks are resolved naturally - the system accepts the chain with more power invested. 

How does PoS address the forking issue?

When a fork occurs, the validators continue to mint on both of them,called the nothing-at-stake problem - one of the major holes in PoS security. 

Unlike in the Proof of Work model, the fork doesn't automatically resolve because it costs nothing for PoS validators to generate blocks on both forks. Furthermore, miners are incentivized to do so since, in theory, they can collect twice as many rewards if they get to validate transactions. 

Hackers can easily exploit a nothing-at-stake security problem to double spend digital coins and collect doubled transactional fees.

Pow_vs_Pos_7

On the left, we can see how the forking issue should be resolved. On the right side of the picture, nodes are disrupting the network by validating transactions on both chains (nothing-at-stake problem).

Energy Intensity

As mentioned above, the energy footprint of the Proof of Work network can’t be matched with any of the consensus mechanisms in the crypto space. As showcased in the histogram above, the total annualized power consumption of the Bitcoin economy approximately exceeds the entire country of Kazakhstan, with a population of 18.75 million.

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Source: University of Cambridge Bitcoin Electricity Consumption Index

To give you an idea of how enormous the gap between PoW and PoS power consumption is, let’s take a look at Ethereum's long-awaited Proof of Stake transition.

In September 2022, Ethereum transitioned from a power-hungry, PoW system to an environmentally friendly PoS system. 

Pow_vs_Pos_9

Source: https://twitter.com/vitalikbuterin/status/1570306185391378434

With the Merge, Ethereum's proof-of-work era ended, and a more environmentally friendly, long-lasting Ethereum was born. According to the Ethereum Foundation, blockchain’s energy consumption dropped by an estimated 99.95%.

In other words, PoS-based Ethereum now uses 2,000 times less energy than PoW-based Ethereum.

Requirements for miners

First of all, let's compare PoW/PoS in terms of hardware requirements.

Given the fact that the PoS ecosystem has become a very lucrative profit opportunity for more and more crypto enthusiasts, a regular computer with a GPU card isn’t enough to actually start mining. Nowadays, mining requires expensive equipment, such as ASIC, and, unlike staked assets, specialized computers have fewer applications and can be used only for mining.

Under PoW: the more powerful hardware you have, the greater are your chances of generating a block.

Under PoS: the more coins you stake, the greater your chances of generating a block.

Even though building up your computer power increases the likelihood of winning a reward, the block generation process within the PoW network is entirely random and unpredictable. On the other hand, proof of stake leans towards favoring the wealthiest nodes, which is unfair to other contributors. Some PoS blockchains have high thresholds when it comes to the minimum stake. When it comes to computational power, PoS, unlike the PoW system, requires less advanced hardware to mint a block.

Decentralization

Both consensus protocols have decentralization flaws on their own.

To strengthen the probability of generating a block and winning rewards, miners team up into mining pools. With all the hashing power combined, each contributor can achieve the desired output better. When a block is discovered, the rewards are split evenly between pool participants. The whole "mining pool" concept makes the block generation process centralized and thus dangerous. 

The chart below illustrates the current balance of power in the Bitcoin mining space (2021 performance):

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Source: https://btc.com/stats/pool?pool_mode=year

According to the chart, if the four largest pools team up, they will have more than 51% of the network's hashing power and manipulate transactions to their benefit.

Speaking of PoS, the consensus model tends to favor nodes with more significant amounts of staked tokens above validators with fewer stake sizes, which leads to unfairness and centralization. Subsequently, rich nodes become more prosperous and more powerful, while relatively poor nodes are left without any perks or rewards.

Security (vulnerability to attacks)

Even if someone gains control over half of a network's computing power (PoW) or supply (PoS), it is easier to recover from PoS attacks. How come? Here is how each consensus would respond to a blockchain attack:

  • In the case of Proof of Work, the attacker faces almost no obstacles that can prevent him from hacking the blockchain more than once (aka spawn camping attack). The community of honest nodes can defend the network by hard-forking it. In such a scenario, the attacker will suffer more expenses to continue the fraudulent activity, but it is still a relatively cheap investment to keep the hack going on.
  • If the Proof of Stake blockchain gets hacked, the “slashing” mechanism comes to the rescue. Essentially, it automatically destroys a large share of the attacker’s stake thereby, stopping malicious operations. If a node wishes to break the network a second time, it will need millions of dollars to stake 51% of the total cryptocurrency supply, which gets even more expensive every next attack.

PoS vs PoW: Wrapping up

To sum up, neither PoW nor PoS offers a perfect solution for every blockchain to reach an agreement. Proof of Stake meant to address the weaknesses of the model it was derived from - PoW - however, it ended up having its own drawbacks that encourage crypto enthusiasts to seek new ways for distributed systems to reach a consensus. If we were to answer: “What consensus protocol is better - PoS vs PoW?” we would have said that it depends on what you cherish more in cryptocurrency.

Proof of Space and Time and Proof of Importance are some of the innovative consensus mechanisms that are now being tested by some blockchains such as Chia Network, for example. Attempting to resolve the problems of PoW and PoS protocols, people mixed existing technologies and new ideas to craft one-of-a-kind models that will scale the blockchain yet preserving its security and immutability.

No matter whether the token is built on PoW, PoS, or any other consensus model, you start thinking about ways to support its liquidity level at some point. To start with, a token's liquidity management is a difficult task on its own, not to mention the fact that the crypto economy is currently facing a liquidity crisis. Even before the liquidity crunch of several big crypto platforms, having a market-maker was crucial to sustaining a deep order book and a stable token price. And now, considering today's market state, hiring an expert crypto market maker is a must. 

Despite the consensus algorithm - if the trading pair of a token or cryptocurrency on the exchange is not liquid and neglected - such a token is unlikely to achieve widespread use and popularity because miners, investors, and traders will not be able to exchange them. Illiquid cryptocurrencies can not expect any community trust and mainstream adoption. Therefore, to sum up everything stated before, your token always needs the support of a market maker.

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