BlogAug, 2021

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Proof of Work vs. Proof of Stake – How do they compare to each other?

Proof of Work vs. Proof of Stake: You may have recently heard about the notion of switching from an Ethereum consensus based on the Proof of Work (PoW) system to one based on the Proof of Stake system.

First of all, let's start with some basic definitions to understand these terminologies better.

What is the Proof of Work?

Proof of work is a mechanism to prevent cyber-attacks such as a distributed denial-of-service attack (DDoS), which aims to deplete a computer system's resources by sending many bogus requests.

The Proof of Work concept existed before bitcoin, so it is nothing new. However, Satoshi Nakamoto used it to revolutionize the way traditional transactions are set using his/her – we still don't know who Nakamoto is – digital currency.

The History of Proof of Work

Cynthia Dwork and Moni Naor introduced the notion in 1993 as a technique to prevent denial-of-service attacks and other service abuses like spam on a network by requiring some work from the service requester, usually in the form of a computer processing time.

Markus Jakobsson and Ari Juels invented and standardized the term "proof of work" in 1999. Bitcoin popularised Proof of work as a foundation for consensus in permissionless blockchains and cryptocurrencies, in which miners compete to append blocks and mint new currency, with each miner experiencing a success probability proportional to their computational effort exerted. The two most well-known Sybil deterrent strategies are PoW (Proof of Work) and PoS (Proof of Stake). They are the most common mechanisms in the context of cryptocurrencies.

But, according to today, Proof of work is maybe the most significant idea behind Nakamoto's bitcoin white paper, which was published back in 2008 – because it led to the basis of Bitcoin.  

How does Proof-of-Work Work?

We'll look at how Proof of Work works in the Bitcoin blockchain network to understand it better. 

Bitcoin is a digital currency supported by a "blockchain," which is a type of distributed ledger. This ledger keeps a record of all bitcoin transactions and organizes them into "blocks" so that no user may spend the same amount of bitcoin twice. The ledger is public, or "distributed," to avoid manipulation; other users would rapidly reject an altered version.

In practice, users identify using hashes, long strings of numbers that act as Proof of work. 

When you run a set of data through a hash function (SHA-256 is used in Bitcoin), it will only ever produce one hash. However, due to the "avalanche effect", even slight changes to any part of the original data will result in an entirely unrecognizable hash. The hash created by a given function will be the same length regardless of the size of the underlying data set. The hash function is a one-way function: it can only be used to verify that the data that created the hash matches the original data.

For a modern computer, generating any hash for a set of bitcoin transactions would be a waste of its time and potential; thus, the bitcoin network sets a particular level of "difficulty" to transform the process into "work." This option is changed such that a new block is "mined" – that is, added to the blockchain by creating a valid hash – every 10 minutes or so. The complexity of a hash is determined by its "target": the lower the target, the narrower the set of valid hashes, and the more difficult it is to construct one. In practice, this means a hash with a long string of zeros at the beginning.

What is Proof of Stake?

Proof of stake will virtualize the consensus mechanism. While the basic procedure is similar to the Proof of Work (POW), the method for achieving the ultimate goal is distinct. POW miners use their computational capability to solve cryptographically tricky puzzles.

History of Proof of Stake

Proof of Stake (PoS) was first proposed in a paper by Sunny King and Scott Nadal in 2012 to reduce the high energy usage of Bitcoin mining. The Bitcoin network was costing an average of $150,000 per day at the time.

How does Proof of Stake Work?

Altcoins are now the only ones using the Proof of Stake concept. When a transaction is launched, the data is compressed into a 1-megabyte block and replicated across many computers or network nodes. The blockchain's administrative body, the nodes, authenticate the validity of each block's transactions.

A block of transactions is added to the blockchain, a public, transparent record, once it has been confirmed. The nodes or miners would have to solve a computational challenge known as the Proof of work problem to complete the verification step. A coin is awarded to the first miner who solves each block transaction challenge.

So, to clarify:

  • Proof of Work requires all miners to solve a difficult sum, with the winner being chosen by who has the most powerful/quantity of hardware devices.
  • The winner of the Proof of Stake model is chosen at random based on the amount they have staked.

How do they compare to each other?

In terms of energy

Miners require a lot of energy in a distributed consensus based on Proof of work. A single Bitcoin transaction used the same energy as 1.57 American families for one day (data from 2015).

These energy costs are paid in fiat currencies, putting downward pressure on the value of digital currencies.

According to a recent analysis, bitcoin transactions could require as much electricity as Denmark by 2020. Developers are concerned about this issue. The Ethereum community intends to use the Proof of stake approach to creating a more environmentally friendly and less expensive distributed form of consensus.

In terms of ownership 

Furthermore, the rewards for creating a new block differ: with Proof-of-Work, the miner may or may not own any of the mined digital currency.

Forgers are always those who possess the coins minted in Proof-of-Stake.

This is also a concern that some people have about Proof of Stake vs. Proof of Work in terms of Proof of Stake helping the affluent get richer. This is because the more coins you can afford to purchase, the more coins you will be able to stake and earn.

Consider this: You can be sure of a solid return on your investment if you have enough money to meet the minimum staking requirement (which most people don't). Those with the most money have the best chance of winning the prize, making the wealthy even wealthier.

However, this is nearly identical to the Proof of Work consensus technique, allowing affluent miners to buy hundreds of ASIC devices.

In terms of security

Any computer system, especially one that deals with money, needs to be free of the threat of hacker attacks. So, the primary issue is: is Proof of Stake or Proof of Work safer?

Experts are concerned, and there are a few doubters in the community.

Bad actors are eliminated from a Proof-of-Work system due to technological and economic disincentives.

In reality, designing an assault on a PoW network is prohibitively expensive, requiring more money than you can steal. Instead, the underlying Proof of Stake algorithm must be as secure as possible because a proof-of-stake-based network could be easier to hack if there are no specific penalties. The second objection to Proof of Stake that some people have is that it allows users to verify transactions across various chains, which Proof of Work does not. This could be a problem because it could allow a hacker to undertake a double-spend attack.

This occurs when someone sends money to someone else, but the money gets spent again before the transaction is completed. Under typical conditions, if all of the other miners on the network see the attempt, it will be stopped. Furthermore, because Proof of Work only permits devices to mine on one chain at a time, the dishonest chain would be rejected outright.

In a Proof of Stake approach, on the other hand, forgers don't have to pay anything to mine on numerous chains, potentially allowing for a successful double-spend, which is also known as the "nothing at stake" issue.

Proof of Work vs. Proof of Stake: What about a switch?

As Etheruem gears up to make the big switch by the summer of 2022, the question is on everybody's mind – would it be any better?

Validators do not need to employ their computational capacity in a PoS system because the only element influencing their chances are the total quantity of their own coins and the network's current complexity.

So this possible future switch from PoW to PoS may provide the following benefits:

  1. Energy savings
  2. A safer network as attacks become more expensive: if a hacker wants to buy 51 percent of all coins, the market reacts by rapidly increasing the price.

Proof of Work VS Proof of Stake: The Conclusion

The current method of mining Ethereum, Bitcoin, Dash, and other cryptocurrencies is called Proof of Work. However, you should now be completely aware of the numerous problems that Proof of Work can cause. This includes the quantity of electricity used, the power centralized by mining pools, and a 51 percent attack potential.

The Proof of Stake concept's benefits was also discussed above. However, as blockchain technology becomes more advanced, many other consensus algorithms are hitting the market, all with their pros and cons.

The debate over Proof of Stake vs. Proof of Work will constantly divide people's viewpoints. However, given that the initial mining Ethereum is being updated, it's evident which process is the most popular.