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Proof of Work vs Proof of Stake: Which is Better? (PoS vs PoW)

Introduction:

The starting of the decentralization ecosystem was to make sure that there is do duplicity taking place while ensuring there is no need for a third party involvement. To accomplish this goal the developers came up with ‘consensus mechanism’; which helps is legitimising these transactions. That being said, this particular term has been used innumerable times this year alone, thanks to probably the biggest technical event to take place in the crypto space; the Ethereum Merge

Types of Consensus Mechanism in Blockchain

To put it simply, a consensus is a mechanism of providing verification to the data uploaded to the blockchain by reaching a decision among the majority of the participants and adding the block to the blockchain once the consensus has been reached. However, since the Proof of work and Proof of Stake are the most commonly used consensus, they are not the only ones available. There are various types of consensus mechanisms that exist beyond the PoS and PoW. They are as the following:

Proof of Activity (PoA)

Proof of activity is a hybrid approach containing features of both Proof of Work and Proof of Stake. The mining process of PoA starts with a standard PoW where various miners try to win the competition to find the new block. When the new block is mined, the block contains only the block header and the miner’s reward address, once that is done, the system switches to PoS. Based on the header, a new group of validators are selected from the blockchain network randomly. However, this time, the validators are chosen based on the stake they own similar to PoS. The same process is followed every time a block is mined. 

Proof of Elapsed Time (PoET)

The Proof of Elapsed Time mechanism is used by IntelLedger. It is an open-source blockchain platform developed by Intel. The process used in PoET is similar to that of PoW but it consumes lesser electricity. The process’s algorithm uses a Trusted Execution Environment (TEE) like Intel’s Software Guard Extensions (SGX) to generate a random leader (generally based on a lottery) who will generate the block and the protocol itself selects the next leader who will be appointed to build the next block. Similar to the block validating process on PoW, in PoET the validators run the TEE using their Intel SGX and each validator requests wait time from the code running in TEE. The validator with the shortest wait time wins the lottery, becomes the leader, and upon his block creation also generates proof of his block creation. The other validators can verify the block creation with the help of the proof. The wait times are generated randomly and this ensures the randomness of the distribution of the lead roles to the validators. 

Proof of Capacity (PoC)

Proof of Capacity also known as Proof of Space works similarly to PoW with a slight distinction. Instead of repeated computations on each block to solve the puzzle, this mechanism makes use of hard drives (memory space) to store the past solutions. The quickest miner to solve the most recent block puzzle wins to mine the block. These stored solutions are called as plots (which contain nonces), and clearly more the plots are saved in your hard drive, better is the probability to have the best solution to the puzzle. Proof of Capacity is an eco-friendly and energy-efficient alternative to Proof of Work. 

Round Robin Consensus

The system of Round Robin Consensus requires a certain level of trust to exist between the mining nodes. In this process, the nodes take turns to create the blocks, and in case the block is absent during its turn, the opportunity is given to any random node This process is generally used in the Private Blockchains.

What is Proof-of-Work

Proof-of-work was the most important consensus mechanism which was ideated in 1993 in order to combat spam and other service abuses. It received its official name as Proof-of-work in 1997. It was heavily unused till Satoshi Nakamoto used it in the development of Bitcoin. Bitcoin used this consensus mechanism to create a network between peers which was further used to secure the Bitcoin blockchain. In this mechanism, the probability of receiving the reward is determined by measuring the work generated. The larger the output of the work, the greater the chances to receive the reward. 

The crypto miners are required to solve cryptographic puzzles. Although this puzzle is a little difficult to solve but is easy to verify. Once the solution is found it gets broadcasted onto the network and the other nodes verify it after which the miner receives the reward.  For the block to be valid, the output is expected to start with a certain number of zeroes at the beginning of the hash value called “The Difficulty”. The output gets changed by the computing power of the network. The creation of the new blocks is slowed down by the adjusted difficulty of the Bitcoin network. 

Advantages and Disadvantages of Proof-of-work 

Advantages 

  • Higher security level
  • Lets the miners earn crypto rewards
  • Provides a decentralized method for verifying transactions

Disadvantages 

  • High consumption of energy.
  • Expensive fees with low transaction speed. 
  • Expensive equipment required for mining 

Top 5 PoW tokens by Market Cap

Name Price (19/9/22) Market Cap Current Supply
Bitcoin $18,780.60 $359,738,164,745 19,154,987.00 BTC
DogeCoin $0.057 $7,587,954,945 132.67B DOGE
Ethereum Classic $29.08 $3,993,694,198 136,946,716.87 ETC
Litecoin $51.24 $3,648,493,569 71,202,843.78 LTC
Monero $138.91 $2,524,942,060 18,176,402.48 XMR

Latest Crypto News on Proof of Work Tokens

  • Bitcoin price, which had been doing slightly better than Ethereum price post the Merge, it seems now over the weekend, Bitcoin is attempting to match Ethereum’s bearishness. Bitcoin has now once again fallen down to its long-term trendline support (marked in black). BTC price has fallen down below its psychological support price level of $20,000 and is even below the $19,000 level. This could bring about further bearishness in the king coin going forward.
  • DOGE has regained its position among the top 10 crypto assets by Market Cap. The token was helped by the DOT price decrease of more than 11% over the past week, which was an unusual drop even in the background of generally negative sentiment on the crypto market.
  • The ETC Price saw a surge in its total value locked amount; more than a 100% increase in its TVL owing to the pouring of more liquidity into the project in anticipation of the Ethereum Merge.  Read more on BeinCrypto

Additional Read: Ethereum Price Prediction

What is Proof-of-Stake

In the proof-of-stake system, validators that are equivalent to miners in PoW are chosen to identify a block on the basis of the number of tokens being held by them rather than having a competition between miners to decide which block to add. This system replaces the work a miner does in PoW with the amount “staked” by the user. The network is secured by this staking structure because the potential participant must purchase the crypto asset and hold it till he is chosen to form a block in order to earn rewards. 

Proof of Stake is somewhat similar to depositing money in your bank accounts where interest is generated on the basis of the duration and amount it is being held. Cryptos utilize it by allocating tokens on the basis of their Coin Age. Coin Age is the duration of time for which the tokens are held. For an instance, if 100 tokens are held for 20 days then its coinage is 2000. 

In the proof-of-stake mechanism, the size of the stake decides the chances for a validator to be chosen to forge the new block. 

Additional Read: What are Smart Contracts?

Advantages and Disadvantages of Proof-of-stake 

Advantages 

  • Does not require expensive equipment for participation. 
  • Fast and inexpensive transaction speed. 
  • Energy-efficient. 

Disadvantages  

  • Lacks in terms of security when compared to proof-of-work.
  • Validators with large holdings can influence the verification of transactions. 
  • Few of the PoS cryptos require locking up staked coins for a certain period of time. 

Additional Read: Which is the best crypto to invest in?

Ethereum Merge: Why is Ethereum shifting to Proof of Stake?

This has been long awaited by the Ethereum community due to a variety of reasons but has been taking quite some time before the engineers implement the final PoS Etheruem Beacon Chain onto the mainnet. This process is being termed the Ethereum Merge – where the PoS-enabled Beacon Chain has been merged into the mainnet. 

The reasons why this shift is beneficial is:

  • Being the largest smart contract capable blockchain network in the crypto space, this move will bring about a massive increase in the speed of processing transactions on the chain, thus making the Ethereum experience more quick and efficient
  • One of the major reason is, being the largest PoW-based smart contract blockchain, the Ethereum network consumes a huge amount of energy. Thus a shift to PoS would cut down the global energy consumption by the Ethereum network by 99.95% (according to or Ethereum.org), which is a total of 0.2%, the biggest decarbonization ever. 
  • Ethereum is still the largest, but a lot of newer and more efficient blockchains are quickly catching up with it, hence this move would serve in keeping Ethereum as the leader in the space.

Top 5 PoS tokens by Market Cap

Name Price (19/9/22) Market Cap Current Supply
Ethereum $1315.10 $161,013,464,321 122,434,027.50 ETH
BNB $263.63 $42,533,767,191 161,337,261.09 BNB
Cardano $0.44 $15,061,409,802 34.18B ADA
Polkadot $6.29 $7,030,473,922 1.12B DOT
Avalanche $16.91 $5,001,010,583 295,735,244.62 AVAX

Latest Crypto News on Proof of Stake Tokens

  • Post the Ethereum Merge, Ethereum price has been one of the worst hit tokens amongst the largest cryptos by market cap. On the charts, it has lost over 20% since the Merge and is still strongly going downward. It lost over 8% on the day of the Ethereum Merge and over the past 24 hours, it has lost well over 10%! This is a very significant fall in terms of absolute values and ETH price has fallen well below the crucial psychological price level of $1500 and is currently trading close to $1300, a far cry from the $2000 it had managed to touch just a few weeks ago.
  • A few days ago BNB Chain confirmed that it had partnered with Google Cloud for the provision of cloud infrastructure for high-growth Web3 projects. In their September 14 announcement, they announced a collaboration to provide cloud computing services and enhanced technical support for early-stage web3 and blockchain projects deployed on BNB Chain. Read more on BSC News
  • Just a little over a month ago, IOHK developers had successfully hard forked the Cardano testnet with the Vasil upgrade. Cardano’s Vasil Hard Fork is the next step in its plan to improve the speed and scalability of the network. This essentially brings the project one more step closer to dethroning the largest smart contract and DeFi platform out there – Ethereum. With this latest upgrade, Cardano’s developers hope to improve the efficiency of smart contracts to make Cardano cheaper and faster to use.

Proof of Stake vs Proof of Work – Which is better?

In short, there are a few fundamental differences which set the Proof of Work and the Proof of Stake apart from each other. Below mentioned are some of those fundamentals:

  • PoW is the first generation of consensus mechanism that was born with the birth of Bitcoin, while PoS is the next generation of a consensus mechanism and some of the biggest networks employing this method include Cardano (ADA) and Algorand (ALGO). Even Ethereum, the largest smart contract blockchain out there is slated to transition from PoW to PoS.
  • PoW involves competing to solve a complex mathematical problem to get the chance to verify the block while PoS works on the principle of staking.
  • Due to the difference in principles – PoW uses a lot more energy to do verify one block, while PoS is able to do that same function at a tiny fraction of what PoW uses.
  • PoW is a much slower process due to the way it functions while PoS is faster than PoW in verifying transactions by an order of magnitude, which is also due to the way it performs the consensus

Looking at the fundamental differences between the two major consensus algorithms does not negate the cons absolutely. Below are some of the Pros and Cons of the Proof of Work and the Proof of Stake consensus. 

Pros 

Proof of Work Proof of Stake
Enhanced security compared to Proof of Stake as miners use energy-intensive operations to add transactions to a block. Highly energy efficient as compared to PoW
Offers better decentralization as the authority of managing transactions is distributed to miners.  Dramatically faster in processing transactions
Less likely to get attacks as mining and verifying transactions on PoW requires expert computational knowledge. Doesn’t require special equipment like ASIC chips required for mining in PoW

Cons

Proof of Work Proof of Stake
PoW is energy exhaustive and produces carbon footprint in abundance. Not as proven in terms of network security as PoW
Requires expensive equipment and resources to run PoW operations.  Validators with a large number of coins staked can exert influence on verification
High network fees and slow processing time causes network congestion.  Coins in PoW need to be locked up in the smart contract and may have a lock-in time

What does all this mean for Crypto investors?

This transition of the ethereum Network to the Proof of Stake consensus is majorly to negate the energy consumption. With this transition, Ethereum is now an energy-efficient blockchain; which is not only saving a whole of 0.2% of the global energy, but also working towards faster block validations and more secure network! The Ethereum Developers is already working towards the next step in this transition process, the Shanghai Update! 

Additional Read:

How will Ethereum Proof of Stake work?

Ethereum Gas Fees

Top FAQs on PoS & PoW

Is Bitcoin proof of work or proof of stake?

Bitcoin network uses Proof of Work consensus.

Is proof of stake better than proof of work?

Proof of Stake is better than Proof of Work in the sense that it is much more energy efficient and validators do not require as intense a method before adding a block into the network.

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