Blockchain 101: Proof-of-Stake vs. Proof-of-Work
Cryptocurrency can feel overwhelming, and no element may be more confusing to newcomers than the divide between Proof-of-Stake and Proof-of-Work networks. These mechanisms, called consensus algorithms, shape a network’s architecture and community. They govern the way nodes get rewarded for participation, the way new coins get minted, the way networks verify blocks and the way they are added to the blockchain.
What is Proof-of-Work?
Proof-of-Work (PoW) is as old as blockchain itself. It was the basis for the very first cryptocurrency, bitcoin. Although the crypto world has evolved significantly since 2008, PoW remains the foundation of bitcoin and other popular cryptocurrencies such as Ethereum.
In a Proof-of-Work system, mining nodes compete to solve a complicated math problem. The first miner that finds the answer to that problem adds the next block to the blockchain.
To find the answer to the math problem, high powered computers (GPUs and ASICs) continually guess answers. At the end of the day, it takes luck to get the answer right. Other resources matter too, however. Nodes with more computing power can make more guesses per second.
After a node broadcasts a feasible answer, other nodes double-check the answer’s correctness and then add the block to their version of the blockchain ledger. The lucky node who finds the answer first earns a crypto-reward as well as all of the transaction fees within the block, this reward + transaction fee is called the block reward.
The Advantages of PoW
Proof-of-Work provided Bitcoin’s original creators with a powerful solution to a tricky problem: security. Forcing nodes to race against each other to solve an equation ensures that only honest miners expending computational resources are building the blockchain ledger. A malicious actor has to invest a substantial amount of computing resources for a small chance of adding a manipulated block. To add a faulty block, they would need to own a majority of the computing power on the network to force other nodes on the network to agree that the block should be added.
The energy (electricity cost) and equipment (cost of cryptocurrency mining hardware) required for this sort of attack means that any attempt to hack a PoW network is unlikely to be profitable. Therefore, Proof-of-Work network users can be confident that honest mining nodes, rather than interloping hackers, get to add a new block to the blockchain. This built-in security is paramount in a truly decentralized network where users don’t rely on a third-party authority to check transactions for validity or choose who gets to participate.
The Disadvantages of PoW
Although Proof-of-Work remains the dominant consensus algorithm on blockchain networks, it also has many disadvantages. The computing power required to unearth new blocks and secure the network translates into a lot of energy and equipment devoted to mining. According to one study, the Bitcoin network consumes as much electricity as the entire country of Ireland (annually).
In addition, high barriers to successful mining have encouraged the emergence of mining pools that collectively control large portions of what is supposed to be a decentralized and random process. That centralization of resources means that Proof-of-Work networks may be susceptible to a 51% attack. This occurs when one entity controls over half of a blockchain’s mining power and thus gains the ability to tamper with new blocks, double-spend and steal coins. In 2014, one mining pool briefly gained over 50% control of the Bitcoin network but relinquished power voluntarily. The next mining entity to gain that much computing power might not be as benevolent.
What is Proof-of-Stake?
Proof-of-Stake (PoS) blockchains provide network security by requiring miners to have a monetary stake in the mining process.
In PoS, users can stake their coins in return for a chance to add the next block to the blockchain and receive the block reward proportional to their staked coins. Similar to Proof-of-Work networks, Proof-of-Stake miners have to send their work out to the rest of the network to be checked for correctness. A malicious miner who tampers with the block would not pass this double-checking process and would lose not only the right to verify blocks in the future, but also the crypto they staked. Conversely, a successful block addition earns the miner the block reward.
Proof-of-Stake on Filmio
Proof-of-Stake can encourage token holders to participate actively in a crypto network even if they don’t have access to expensive mining rigs. Instead of competing with other powerful machines in a Proof-of-Work race, Proof-of-Stake users can leverage their wealth to support the community.
We’ve decided to use a Proof-of-Stake consensus algorithm for the Filmio blockchain. The Filmio community can stake their FAN tokens, allowing the network to leverage the staking node operators computing resources to help provide the bandwidth, file storage as well as manage the other needs of Filmio’s decentralized media streaming service. Individuals who stake effectively earn streaming rights and additional tokens in return for supporting the community.
Advantages of Proof-of-Stake
Proof-of-Stake requires far less computational competition, drastically cutting down the time and energy needed to find new blocks. Proof-of-Stake blockchains are also resilient against 51% attacks. The only way to gain over 50% of block-signing power in Proof-of-Stake is to own over 50% of the network’s cryptocurrency. All of these advantages have pushed Ethereum, the second-largest coin by market capitalization, to start working on a switch from Proof-of-Work to Proof-of-Stake.
Disadvantages of Proof-of-Stake
Critics of PoS often point to a structural flaw: the rich inevitably get richer. Wealthier token holders can stake more crypto and forge more blocks, earning them more transaction fees and block rewards, thereby increasing their future mining rights. In addition, miners can stake their coins to multiple chains at once with no opportunity cost, creating confusion as to which chains are actually valuable and not just being used to earn a miner passive income.
Which is Better?
There are no easy solutions when it comes to picking between Proof-of-Work and Proof-of-Stake. Proof-of-Work sacrifices resource efficiency for high levels of security. Proof-of-Stake is far lighter and faster, but requires careful design to avoid structural pitfalls.
This means that Proof-of-Stake may be appropriate for a more community-oriented crypto network that relies on democratic governance. Staking helps everyone (not just resource-rich mining pools) participate in the decision making of a close community. Proof-of-Work, on the other hand, may be more appropriate for networks that highlight anonymity and security above all else.
The crypto world is over a decade old, and will no doubt continue to show as much growth and change as it has in the past. Proof-of-Stake and Proof-of-Work, not to mention a handful of far less common but still promising architectures, will continue to evolve as various blockchain networks develop for different industries and uses.