In 2020, the United States’ greenhouse gas emissions totaled 5,981 million metric tons. When cryptocurrency mining and validation began, Proof-of-Work (PoW) was the most common validation technique. However, the hardware used for this process was expensive and required tremendous amounts of energy.
While PoW is still relevant in the crypto industry, a new algorithm known as Proof-of-Stake (PoS) is available. As opposed to PoW, PoS is more environmentally friendly, requires less energy, and there’s no need to use significant hardware components. This leads to the concern of whether cryptocurrency miners should embrace PoS instead of PoW as a primary validation method.
Since transactions need to be verified and validated, alternative methods have arisen, proving themselves friendlier to the environment and focused on lower costs. In this review, we will compare Proof of Work vs Proof of Stake and other aspects of these consensus mechanisms.
What Is a Consensus Mechanism
At the heart of every blockchain lies a consensus mechanism. For example, in Bitcoin, we have a decentralized ledger that the miners update. Because the blockchain is stored on multiple devices, all these miners need to agree on the common true variant of the chain. They do that efficiently thanks to the consensus mechanism, which acts as a set of rules that describe how the mentioned process is supposed to work.
To put it another way, the consensus mechanism is a sophisticated method of stating rules that everyone agrees on so that there can be a unitary version of the ledger.
There are many different forms of consensus mechanisms, and some of the most popular are:
- Proof-of-Work (PoW);
- Proof-of-Stake (PoS) ;
- Delegated Proof-of-Stake (DPoS);
- Proof-of-Capacity (PoC);
- Proof-of-Elapsed Time (PoET);
- Practical Byzantine Fault Tolerance (PBFT);
- Direct Acyclic Graph (DAG).
What Is Proof of Work?
Proof of Work (PoW) is a technique used in the crypto world to verify the transactions that are then added to the blockchain. Cryptocurrencies run on a decentralized network; therefore, there is no centralized way to validate these transactions. The lack of a central governing authority in cryptocurrency leads to the use of Proof of Work to ensure the integrity of any incoming transactions.
Miners use Proof of Work to add new licit data to the blockchain. When miners verify the quality of the transactions, they are rewarded with crypto. The PoW algorithm is used by blockchain systems to complete and add new blocks by using computational power. The existence of PoW reinforces trust among decentralized networks.
When a transaction has to be validated, the first miner to solve the equation is allowed to add it to the blockchain. However, the validator will earn their reward only after other participants have verified that the data is trustworthy.
As aforementioned, PoW requires specific equipment, which usually consumes much energy. For example, imagine that mining a single BTC requires 1,449 kWh, which is enough to sustain an average US household for approximately 13 years.
What Is Proof of Stake?
Proof of Stake (PoS) differs from Proof of Work in a few ways. PoS is also a consensus mechanism used to verify new transactions.
Unlike PoW, PoS chooses a validator based on the amount of a specific crypto they own and are willing to lock up through a process called staking.
Once a new block is added, stakers can validate new transactions based on which they will be rewarded. However, not all validators perform their transactions correctly. Those who fail to validate a transaction as required may lose part or their entire stake.
Some of the biggest cryptocurrencies using the PoS system include Cardano, Solana, and Terra.
Recently, Ethereum also shifted to using the PoS validation method. In comparing Proof of Work vs Proof of Stake, the main difference is the absence of heavy computation hardware in the PoS mechanism, which makes it more environmentally friendly.
What Is Staking?
Staking is a process where a user agrees to lock a part of their crypto assets, this way earning the opportunity to validate new blocks of data that will be added to the blockchain; this process is backed by a smart contract. The selection is completed through an algorithm, which chooses validators based on the amount of crypto they have staked. The more one stakes, the higher the chances they will be chosen as validators.
From a business perspective, staking can be regarded as interest income. You will only earn the interest once you have completed a task correctly. Incomplete or failed tasks will automatically result in an assessment or a fine.
PoS vs PoW
To better understand the differences between these two systems, the table below will showcase some of the main characteristics of the two consensus mechanisms next to each other.
|Transaction validation probability||Is determined by the miner’s computing power.||Is determined by the validators stake size.|
|Rewards||Are paid to the first miner to solve each block’s cryptographic problem.||Are usually paid from network fees.|
|How does it work||Miners compete by solving cryptographic puzzles with their computer processing power to finish a block and add it to the chain.||The validator can be voted, or randomly picked. Once chosen he signs the transaction granting legitimacy through his stake.|
|51% attack||Hackers require at least 51% of computing power to attack the system and create a fork chain that grows faster than the true chain. The goal is to make all the other miners believe that the fork is the true chain.||To breach the system, hackers would require at least 51% of all coins on the network, and bypass security mechanisms preventing the same validators to create blocks in a row.|
|Energy consuming||Bitcoin network annual power demand is estimated around 127TWh.||PoS systems are more cost-effective and energy efficient than PoW systems, although they are less well-proven. This assumption comes from the fact that under no circumstances staking requires large computer facilities to confirm transactions.|
|Equipment||Mining on PoW requires CPU cards, GPU cards, and/or ASIC devices.||The standard server-grade device is more than enough for PoS. Furthermore, a medium performance computer with stable internet connection can work for most Proof-of-Stake environments.|
There are some differences between PoS and PoW consensus mechanisms. PoW was an integrity design created to eliminate the double spending issue. The advantage of PoW is that it’s one of the most secure mechanisms. However, it requires more mining power.
The PoS mechanism, on the other hand, requires no complex mining hardware. All that is needed is a regular personalized computer combined with a stable internet connection. PoS also does not consume too much energy, and you can comfortably use it at home.
The main disadvantage of PoS is that it has governance issues. Those holding more tokens can change the network rules.
The Effect of Switching from PoW to PoS
Switching from PoW to PoS is believed to influence the cryptocurrency world positively. At the moment, Proof-of-Stake seems to be one of the most promising consensus mechanisms that can bring scalability back to crypto and bring it closer to the initial vision of being a proper worldwide medium of exchange.
Currently, Proof-of-Work requires enormous power that will only grow as the hash rate and mining difficulty increase. This phenomenon is not only particular to Bitcoin but manifests in most PoW cryptocurrencies.
Therefore, Proof-of-Stake requires significantly less energy to achieve consensus, making the whole validating process more efficient.
Yet, one disadvantage of PoS is that it may face more vulnerability. And in Ethereum’s case, the whole network will indeed become more accessible to all parties involved and increase the scalability, but we’re still to see how it will play out.
Despite its energy and hardware efficiency benefits, we must accept that PoS is still in its infancy and has to prove itself.
Ethereum Moving to PoS
At the beginning of September, Ethereum highlighted that they would be transitioning from PoW to PoS. Most people have associated this transition with the advantages associated with PoS. PoS is not as power-hungry as PoW, thus being more environmentally friendly. Far from these advantages, what will this transition mean to crypto enthusiasts?
Before The Merge, Ethereum operated in the same manner as Bitcoin. Its transactions were mined from a decentralized network. Miners competed to solve mathematical equations and were rewarded with ETH. As explained earlier, PoW required computers to agree on the most recent transactions before they were stored on the chain.
This process was extremely energy unfriendly. The Merge means that not only will the transactions be validated quicker, but they will also be energy friendly. Miners will not be expected to have powerful hardware for the process.
Ethereum moving to PoS also means that they will establish a more secure system. As more ETH is staked, the security of the network grows stronger. One will be expected to control most of the network to attack the network, which is close to impossible.
To become a validator, a user is expected to activate their slot using 32 ETH. Once you are a validator, you can stake lower amounts. The Ethereum network provides several staking options. Keep in mind that, before choosing one for your validating activity, it is essential to research each and calculate their risks and outcomes.
Solo staking provides full participation rewards to the user. A validator will work independently without trusting their assets to others.
Crypto holders looking forward to solo staking will be required to stake 32 ETH. The validation process is now easier since several tools are designed to ease the task.
This is an option for those seeking to utilize the service but do not want to involve themselves with hardware. Therefore, users will deposit their 32 ETH to activate their validator status. They will then delegate the validation process while they wait patiently to receive the rewards.
Though this option does not put the user at much risk, it does require a certain level of trust in the service provider. Any risk presented in this case has been eliminated since the withdrawal keys remain private.
This option has been designed for validators not comfortable with staking 32 ETH. They can use the liquid staking option that allows easy and anytime exiting.
Through this option, users can hold their assets in their wallets. It should be noted that this option is not native to the network. It is a third-party option integrated into the network, thus it has its risks.
Many crypto enthusiasts are gradually joining the bandwagon of mining and validating crypto transactions.
While there are two primary options for those seeking to participate in this process, each has its advantages and downsides.
Ethereum has already embraced the PoS technique that is fundamentally better compared to PoW. However, the industry is yet to achieve the level of simplicity that crypto mining and validation require.