Proof of Work vs. Proof of Stake in Simple Terms
Ever wonder how cryptocurrencies like Bitcoin and Ethereum are able to function without banks or other middlemen verifying transactions? Consensus mechanisms (how networks come to agreement on transactions), such as Proof of Work (PoW) and Proof of Stake (PoS), are what make peer-to-peer digital transactions possible.
While PoW and PoS are both used in crypto, they are quite different in how they work. This article will tell you the difference between Proof of Work vs. Proof of Stake in a way that’s easy to understand.
Proof of Work vs. Proof of Stake Simple Explanation
In a PoW system, transactions are verified by “miners”, who use their computer hardware to solve complex mathematical equations for the right to add new groups of transactions (blocks) to the blockchain (record of all blocks and the transactions in them).
It’s only by solving these problems that a new block can be added to the last block of the blockchain. By being the first to solve one of these mathematical puzzles and add new transactions to the blockchain, a miner is rewarded with a block reward and transaction fees in the form of cryptocurrency, such as BTC.
Proof of Stake works a bit differently. Instead of miners, there are “validators” (also called other names, such as “bakers” on Tezos). These validators don’t use hardware to solve complex mathematical puzzles. Instead, they lock up or “stake” their crypto as collateral for the right to verify transactions.
Factors like the size of the stake and how long the crypto has been staked help determine who gets the right to verify transactions, whereas mining or hashing power of hardware would generally determine verification rights in PoW systems. If you’re lucky enough to validate a new block of transactions, you are rewarded with new cryptocurrency and/or transaction fees, similar to PoW.
But if Proof of Work is able to power extremely popular cryptocurrencies like BTC and ETH, why the interest in other consensus mechanisms like Proof of Stake?
Proof of Work vs. Proof of Stake Energy Consumption
When it comes to Proof of Stake vs Proof of Work, one of the main arguments for using PoS is its minimal energy consumption. The complex mathematical puzzles miners have to solve in PoW are very computationally intensive. In other words, their hardware uses a lot of electricity to try and solve those problems.
PoS, on the other hand, requires very little energy to run. This could be better for the environment in the long term, as crypto mining will probably only grow bigger and bigger moving forward thanks to the bright future of cryptocurrency. This means that if we keep using PoW, energy consumption will grow, too.
Proof of Work vs. Proof of Stake Decentralization
One of the main premises of cryptocurrency is that it is decentralized. Instead of 1 central authority, such as a bank, that is responsible for verifying transactions, you have a network of miners or validators.
So when it comes to the decentralization of Proof of Stake vs. Proof of Work, which is more decentralized? Since mining requires the purchase of hardware, the technical know-how to set it up, and high energy consumption, not everyone is interested in becoming a miner. Meanwhile, becoming a validator is far easier by comparison, requiring just some cryptocurrency.
However, one way in which Proof of Work is more decentralized than Proof of Stake is that the crypto has a chance of being more distributed among users. Miners naturally have to sell some of their mining profits to pay for overhead costs like electricity.
On the other hand, validators in PoS don’t have much overhead at all, which means they can just keep on staking any rewards they earn, which could lead to centralization and a lack of crypto asset distribution among users.
Proof of Work vs. Proof of Stake Security
Proof of Work has shown its resilience, at least on Bitcoin, the first and oldest cryptocurrency. In Bitcoin’s existence of more than a decade, Proof of Work has yet to fail. On the other hand, Proof of Stake might seem like a good idea in some respects, but it just isn’t as proven or tested, which isn’t good when peoples’ money is on the line.
One of the biggest security problems that Proof of Stake has is that when a blockchain forks or splits due to things like disagreement between members of the community, PoW miners have to choose where to direct their mining power: the newly forked blockchain or the original blockchain.
Splitting their mining power wouldn’t make sense, since that would give them a lower shot at mining crypto on either of the 2 chains.This discourages constant forking by users who just want to chase newly created money at the cost of the network’s integrity.
Proof of Stake, though, in the case of a fork, lets validators validate the transactions of both blockchains resulting from a fork without any consequences, since it doesn’t take any additional resources, such as more mining power on PoW, to validate transactions on multiple forks of a PoS crypto asset.
Thus, users could simply create tons of forked cryptos with Proof of Stake. Also, they could “double spend” crypto, or spend the same unit of crypto twice by spending it on 1 blockchain, then forking, or splitting from the old blockchain to create a new blockchain where the spending transaction doesn’t exist. This allows them to spend that unit of crypto again (double spend).
This ability to fork without consequence in PoS is the “nothing at stake” problem and solutions like slashing or confiscating stakes for bad behavior, such as signing off on many forks at once, have been proposed.
However, one way in which PoS might be more secure than PoW is that a 51% attack, or when a malicious actor or group gains majority control of the network, would potentially be much more expensive to execute on PoS. In a PoW system, someone would have to buy tons of mining equipment, which of course is expensive.
Nevertheless, buying 51% of a PoS crypto’s outstanding currency might be even more expensive, since buying that much would drastically increase the price, as purchases were being made. This is because it likely wouldn’t be possible to buy all 51% at once. Every purchase would push the crypto's price higher and higher. Not to mention buying that much of a cryptocurrency from various parties would likely be very difficult or even impossible.
Proof of Work vs Proof of Stake Ethereum
One of the main reasons that the PoW vs. PoS debate gets so much attention is that one of the most popular cryptocurrencies, Ethereum, is transitioning to Proof of Stake. Indeed, ETH’s move from PoW to PoS is one of the most anticipated events in the blockchain space. For more info, including what will happen to ETH miners, the minimum stake to participate in ETH Proof of Stake, and yearly returns for ETH staking, see our Ethereum Proof of Stake article.
Proof of Stake Taxes
Curious to know how Proof of Stake affects taxes for validators? Our Cryptocurrency Taxes USA article has you covered.
Proof of Work and Proof of Stake are two of the most prominent consensus mechanisms for decentralized blockchain networks. Though some might want to say that one is better than the other, it’s hard to draw that comparison for Proof of Work vs. Proof of Stake - at least for now.
Proof of Stake is undeniably better in terms of lower energy consumption (and thus lower environmental impact); however, it is largely untested, at least on the scale of Proof of Work, which has seen over a decade of testing on the popular Bitcoin network.
Moreover, there are likely advantages and disadvantages to Proof of Stake that we haven’t even thought of yet. For instance, no one foresaw Bitcoin becoming this energy-intensive, as the specialized mining devices in use today, ASICs, did not emerge until later.
For now, it’s safe to say that Proof of Stake is yet another interesting development in the rapidly evolving blockchain space and we’re excited to see where it goes as well as the impact it has on the broader ecosystem.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.