Getting technical: The difference between Proof of Work and Proof of Stake
Until its implementation by Satoshi Nakamoto as the core of Bitcoins blockchain algorithm, a Proof of Work consensus (PoW) had been theorized and left mostly unused since the early nineties. Given Bitcoin is considered a dominant force in cryptocurrency technology, the common assumption is that all crypto tokens should adopt a Proof of Work algorithm for their own blockchain network.
Proof of Work versus Proof of Stake
Instead, an increasing number of developing blockchains, including Rebellious, are implementing a proof of stake (PoS) algorithm to secure their networks. But, if PoW has been used for years why should blockchain users trust a Proof of Stake consensus as an alternative? Why rock the boat? As you’ll see from the fundamental principles of both, Proof of Stake offers some pretty significant advantages over a Proof of Work model. It still contains flaws, but those flaws are both easier to manage and less likely to be manipulated.
Let’s start by detailing the key points of a Proof of Work algorithm.
How does Proof of Work operate?
The Bitcoin blockchain network relies on miners to unlock the next block. By successfully solving a series of cryptographic puzzles they are rewarded in the form of bitcoin tokens. However, in doing so, running costs for miners is substantial. Solving these digital riddles requires a lot of computing power and equal amounts of costly electricity.
As such, by investing in better or more powerful computing equipment, you have a higher chance of being the first to unlock the next block in the chain, a result of your increased hash rate. The trade-off is, in some cases, incredibly high electricity costs as some mining farms have expanded to the size of a warehouse, all in an effort to be the first to redeem the bitcoin reward.
Hash Rate and Mining Pools
We mentioned hash rate, and this is another crucial aspect of PoW that PoS doesn’t have, but for a good reason. Hash rate relates to the speed at which a computer is completing a task on a PoW blockchain. The higher your hash rate, the higher your chances of finding the next block to be solved, and receiving a token reward. Better equipment improves your hash rate, so, unfortunately, PoW networks have reached a stage where miners that have invested heavily in top of the range equipment to have a higher chance of receiving further rewards perpetuating the cycle. PoW doesn’t allow all parties to have relatively equal a chance at unlocking the next block.
To remedy this, some miners have collaborated to create mining pools so that they can combine mining power and split the rewards evenly, with every member taking a share. While this approach goes some of the way to level the playing field for new blockchain users, it encourages further underlying problems through economies of scale. If a rival mining pool is larger than the one you have joined, they will have a higher chance of being the first to unlock the next block. While it is incredibly difficult to get to a stage where a mining pool could control over 51% of the network, giving them precedence over the unlocking of future blocks, the risk is still present. Controlling shares in a PoW blockchain could result in the authorization of fraudulent transactions, although in most circumstance the investment required to do so would be counterproductive.
What makes Proof of Stake different?
With the fundamental principles of a Proof of Work algorithm covered, how does Proof of Stake operate?
Rather than letting every connected user have the chance to solve the next block, PoS opts for a randomized (almost) selection method. Any node can be selected to validate the next block as long as they have a stake in the network.
That stake would be a deposit of tokens from their own wallet, and by increasing the amount a validator stakes, they increase the chance of being selected to forge the next block. The process isn’t completely random when it decides the next validator, but it still allows a linear correlation between chance and stake, resulting in a better reward opportunity model than PoW.
Can all validators be trusted?
Once selected, a validator must check that all the transactions contained within the block are legitimate, a process that involves verifying if it was signed with the correct private key and auditing the entire history of the wallet to prevent double spending. After doing so, they are rewarded with the fees associated with every transaction contained within the block. At this stage, you might be thinking, what stops a validator from increasing their stake to authorize fraudulent transactions?
Firstly, validators would have to be selected, which even if they had an incredibly large stake, is still down to an element of chance. Secondly, if the authorized block is found to be fraudulent, their entire stake would be lost as punishment. However, this approach only works as long as the stake equals more than what they would earn in transaction fees. Furthermore, once validators want to withdraw their earnings and their stake a time delay is enforced just in case their previous blocks are found to be fraudulent, validators are unable to “authorize and run” with both their stake and their rewarded tokens.
The advantages of Proof of Stake
Straightaway you can see that any users on a Proof of Stake network have a vested interest in only authorizing legitimate transactions; otherwise, they risk being punished and losing their stake. A blockchain network built upon this type of validation model incentivizes everyone to become a validator, a decision that is further encouraged by the lack of expensive equipment needed or phenomenal running costs. More users equal a larger, more stable network with a stronger cryptocurrency value.
Due to the decentralized nature of PoS, it is even harder for any one party to control over 51% of the network and be in a position to authorize fraudulent transactions. Even though, as we alluded to, this is still incredibly difficult on the previously mentioned PoW blockchain network, it is still a possible reality compared to cryptocurrencies operating on a Proof of Stake consensus.
Which algorithm is ‘better’?
Proof of stake isn’t without its flaws. It is theoretically possible to buy a stake that is over 51% of the total market value and have a controlling share of the network. Realistically though, the financial outlay would not be worth the effort. The value of the token could put the cost of buying over 51% well into the billions. In addition, PoS has to be careful how it selects the next validator.
If they are chosen on stake alone, then the same validators would be rewarded over and over again as they could increase their stake with the transaction fees. However, by adding in the chance for any validator to be chosen, you could end up in a situation where the stake is less than the transaction fees. The validator could authorize a fraudulent transaction and potentially still end up better off.
Concluding on PoS vs PoW
Even though Proof of Stake has some additional risks to Proof of Work networks, those risks can be managed and mitigated. The result is a much fairer network that costs less to run for all parties involved, with a much smaller ecological impact. Validators can have an active role in the network without being penalized for lack of expensive equipment, and by having a stake in the success of legitimate transactions the culture harboured is a remarkably positive one. Failure of the network would result in a loss for all validators.
PoS fully encompasses the decentralized values that lay at the core of cryptocurrency and blockchain technology that we at REBL embrace.