Proof of Work vs Proof of Stake

I’ve noticed lately that when talking about Ethereum to people that most have no idea about Proof of Stake and its impacts. It’s time to change that!

To understand what Proof of Stake (POS) is, you must first understand the model we have in place today, called Proof of Work (POW). On any blockchain, the various transactions and announcements are recorded by computers on the network called ‘nodes’ or ‘miners’. Once a certain number of transactions have taken place the miners stop to make sure everyone has the same record of transactions. This is done by assigning a very hard math problem to all the miners. The first one who comes up with the answer gets rewarded IF, and only if, the majority of the other miners agree with that miner’s list of transactions. If the winning miner is trying to cheat, the rest of the network will disagree and start over. The cheating miner just invested a lot of time and effort (ie — money) and got no reward.

This is how we do things today, and as blockchains have exploded in popularity this model has lead to two big concerns:

#1 — Scalability. Proof of Work worked great in the early days, but as blockchain tech has exploded it’s shown its limits. The Ethereum network is currently processing 10–15 transactions a second, which is not enough to support full scale global applications and commerce.

#2 — Centralization. A core tenet of all distributed ledger technologies is de-centralization. As POW blockchains grow, the math problems the nodes have to solve become harder and harder. Personal computers and devices no longer have enough power to contribute to mining efforts in a meaningful way, and the bulk of today’s mining takes place in a handful of massive data centers. This stands in stark contrast to the guiding principle of blockchain — decentralization.

The incentive towards honesty that Proof of Work provides is simple — “if you’re honest you get rewarded, if you cheat you loose money”. Proof of Stake aims to provide the same incentive in a less computationally expensive way. In Proof of Stake, everytime a block of transactions needs to be validated the ‘miners’ (now called ‘validators’) are all required to place a large sum of money (a stake) on the table. If your transactions match the transactions of the majority of the group, you all split a reward. If your transactions do not match, you loose your stake.

Imagine a new casino card game called ‘Honesty’. The rules of the game are simple. First, you have to stake or deposit $25,000 of chips in order to sit at the table. If you’re honest, you will win $25 every hand, no matter what. If you cheat, you loose you’re $25,000 stake. If you’ve been honest and you’re done playing you take your stake and winnings and go on your way.

This game is essentially Proof of Stake. It provides the same economic incentive towards honesty that Proof of Work does, but without requiring massive computational resources to do so.

This means that provided they have the stake, anyone can be a validator. You can validate transactions on the blockchain from your living room laptop, and make money doing it too. The rewards of validation no longer go to those who spend the most on hardware and infrastructure, but to those who care enough about the integrity of the data to place quite a large bet.

Ethereum is in the process of the testing the Casper release, which contains the beginning of the switch over to Proof of Stake. So far the results are looking good, and if timetables hold we should see Casper in production later this year. You can expect transaction times and costs to drop significantly, and an exciting new batch of applications to be build on top of the new capabilities!