Blockchain has the potential to produce revolutionary change in a multitude of areas and sectors, However, most people – including plenty of cryptocurrency investors – don’t fully understand the technology that underpins it. We aim to educate and inform you to help you make smarter choices when investing in blockchain and crypto.
Two of the most well-known terms within the crypto space are Proof of Work (PoW) and Proof of Stake (PoS). Crypto Lists bring you a concise guide to these two unique consensus mechanisms. Sometimes these are also referred to as consensus methods or consensus models, but ultimately they all mean the same thing. These are two of the most famous mechanisms because one (PoS) is used by the Bitcoin blockchain and the other (PoS) is now used by Ethereum.
The Ethereum Merge brings the two models into focus
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- 1 The Ethereum Merge brings the two models into focus
- 2 Continuous Comparisons between PoS and PoW
- 3 Understanding the Functionality of the Proof of Work Model
- 4 Understanding the Functionality of the Proof of Stake Model
- 5 Advantages and Disadvantages of the POW Model
- 6 Advantages and Disadvantages of the PoS Consensus
- 7 PoW vs PoS Energy Consumption
- 8 Prominent Blockchains Using the PoW Model
The majority of 2022 Crypto news has revolved around the much anticipated Ethereum Merge, as reported by Crypto Lists. After much reporting and speculation, the day finally arrived in Mid-September. The completion of the Ethereum Merge coincided with Ether’s (ETH)
price having a modest drop shortly afterwards. This was the first instance of a clear and actual view of how the shift might impact various cryptocurrencies’ value away from prior speculations.
The speculations were mostly on how the Merge would affect the value of crypto coins and tokens in the short term as it’s perhaps challenging to predict its long-term effects. However, the shift is still significant to the crypto industry as the change signifies differences in the consensus mechanism in validating transactions on a blockchain network.
The long-planned upgrade of the Ethereum Network was from its proof-of-work model to a proof-of stake-consensus. Casual investors are yet to notice any particular distinction since the transition.
Continuous Comparisons between PoS and PoW
Several experts in the crypto industry prescribe to the proof-of-stake model. They view it as a better and more efficient consensus mechanism for a blockchain network. Adam Blumberg is the Certified Financial Planner, Co-founder, and President of Interaxis, a company specialising in offering consultation services to financial advisors on crypto assets. He acknowledges that various blockchain networks utilise either mechanism in verifying transactions. However, he believes that the proof of stake mechanism is more suitable for financial systems.
Comparisons between the two mechanisms will always be there and investors must understand each of them and their various pros and cons.
Understanding the Functionality of the Proof of Work Model
The proof-of-Work (PoW) model is the pioneer consensus mechanism in the crypto market as it has underpinned the Bitcoin blockchain since its launch in 2009. The PoW model functions where other computers within a network validate and approve transactions added to a blockchain network before new blocks are developed and entered into the blockchain.
The consensus protocol requires users to solve cryptographic puzzles via their computers to earn the privilege of verifying transactions on the blockchain. The process of solving these cryptographic puzzles to validate transactions is called cryptocurrency mining. There exists a long string of numbers and letters, known as hashes, that would stave off malicious attacks and validate transactions. The blockchain can only generate one hash when it’s fed data through a function of the network as the basis of transactions on the protocol.
Where there is a transaction on the blockchain, the resulting hash distributes to the entire network. This also applies to bitcoin transfers to another address. Therefore, if anyone tampers with the hash, it would be identified in the network and rejected.
The PoW allows blockchains to maintain their ‘trustless’ feature. This ensures means that no third parties are required to verify and manage the transactions. Adam Blumberg points out that PoW, especially for the Bitcoin protocol is the supreme mechanism in asset development. He highlights that the time, effort, and conversion of energy to value make it so powerful in supporting Bitcoin’s value.
Understanding the Functionality of the Proof of Stake Model
The Proof-of-Stake(PoS) consensus mechanism is the alternative to PoW. In the PoS model, users can develop a node as an individual or a collaborative pool that functions as a validator computer in securing the Pos model. The PoS model relies on validators that own the native token of the particular blockchain. Validators must lock up their own native blockchain tokens in the network through staking. Staking facilitates the validators to provide collateral when they are selected to validate a transaction. The blockchain randomly selects a validator, approximately based on how many tokens they have locked in the network. Accurate validation of a transaction yields rewards to the chosen validator once the transaction goes through.
Multiple validators must agree upon the accuracy of a transaction. When the threshold of the number of nodes is reached, the transaction goes through. The selected validator then receives a reward. If the transaction is inaccurate or fraudulent, the selected validator loses part or whole of their staked tokens to the network as the network destroys these coins.
As Blumberg highlights, the PoS model is an energy-efficient consensus protocol compared to PoW. This is why many environmental activists and campaign groups have affirmed their preference for cryptos that use the proof-of-stake mechanism.
It is, however, challenging to maintain the security and decentralisation of proof of work when using the PoS model. The PoS model has to address this concern to achieve a long-term decentralised finance (DeFi) system. It must be fast, secure, and provide real-time transactions. It’s for this reason that ‘Bitcoin Maximalists’ and DeFi devotees remain committed to the PoW method for the time being.
Advantages and Disadvantages of the POW Model
The PoW mechanism requires several participants across the protocol to countercheck and validate transactions. This ensures that the validation process is more decentralised. It’s often the preference of the crypto industry that protocols are to be more decentralised.
However, several participants translate to several computers being in use for the validation process. The more computers, the higher the energy used in the process. There has been a significant increase in cryptocurrency adoption in recent years. This has been led by traditional financial institutions which have unintentionally exposed the environmental impact of cryptocurrency mining. As mainstream adoption takes shape, increased scrutiny over the model develops. The model has a high barrier to entry by design with higher costs to validate transactions. This effectively prevents hacks and malicious attacks on the blockchain network. These attacks have been especially prevalent in the crypto market.
The nature of the PoW model results in slow transactions and an adverse environmental impact. And, the model is not always practical for some of the use cases of blockchain. Users cannot underestimate the importance of PoW for Bitcoin. However, Blumberg believes financial systems cannot be built on the PoW mechanism. He believes that PoS and ‘Proof of History‘ facilitate the development of thriving financial systems.
Advantages and Disadvantages of the PoS Consensus
Several crypto experts showcase that the Proof of Stake consensus mechanism contains more pros compared to the Proof of Work model. The model portrays faster transaction speeds and is more energy efficient. This facilitates blockchain scalability in the number of transactions per second. This creates a massive appeal and has more adoption, especially among new crypto users.
The PoS model provides users with several ways of earning crypto. There are liquidity pools in which users can lock up their coins and receive more tokens as a reward. The opportunity to earn more increases its appeal further as users integrate into a financial system.
Despite the lucrative rewards appeal, you must be more cautious in the cryptocurrencies you invest in. The infancy of the crypto market has several altcoins offering larger staking rewards with a higher chance of collapsing. It has less security than the PoW and is harder to decentralise the network.
PoW vs PoS Energy Consumption
As discussed, the PoW model has a higher energy consumption than the PoS model. According to the Cambridge Center for Alternative Finance, the pioneering network of Bitcoin consumes similar amounts of energy as the nations of Malaysia and Sweden. This is due to the PoW system use of sheer computational power, meanwhile some Bitcoin mining companies have enormous computing hubs. However, some are starting to point out the green case for Bitcoin’s blockchain.
The PoS model uses significantly less energy as it does not require any specialised equipment. It only requires the average laptop hence allowing for blockchain scalability and less electronic waste to be generated. Its nodes are virtual spaces. The Ethereum foundation revealed that the Ethereum merge shifting the network from PoW to PoS will save 99% more energy.
Prominent Blockchains Using the PoW Model
Bitcoin hosts the most reputable PoW blockchain. Other blockchains utilising PoW include Litecoin, Bitcoin Cash, Dogecoin, and Monero. Many insiders have the opinion that both mechanisms can coexist together with upcoming consensus protocols. These include Solana’s Proof of History for verifying transactions.