Proof Of Work vs Proof Of Stake

This article was originally written on the 14th November 2017 however the concept is still the same. Figures will have changed, for POW, they have likely increased.

Proof of work

Proof of work (POW) is a transnational verification method where nodes use their hashing power to solve increasingly complicated algorithms that will produce a hash and allow the block to be verified — and therefore the miner that solved the algorithm is rewarded in the respective cryptocurrency.

Proof of work is like a lottery in the sense that any miner can compete to solve the algorithm, however, the higher the hashrate of a node / group of nodes, the greater the probability of them solving the algorithm. The increase of miners combined with the increase in transactions has lead to the difficulty of a hash being produced (image 2.) to rise alongside the price of Bitcoin (image 1.).

The fundamental issue with POW is that as the hash rate difficulty increases, as do the cost associated with mining the blocks, or in simpler terms, verifying the transactions.

This is a problem for two main reasons:

1. Energy consumption

A study from Digiconomist found that each transaction on the Bitcoin blockchain uses 236 KWh worth of electricity , this amount is enough to power 8 U.S households for an entire day.

Now to put things into perspective, there are over 300,000 transactions per day. At this rate, Bitcoin uses more electricity per year than the whole of Nigeria.

Read more here:

Proof of work is vastly uneconomic and damages the environment at an alarming rate.

2. Scalability issues

Energy consumption will hinder the scalability issues of Bitcoin, however the other issue that arises with POW mining is that with the increase in cost associated with mining BTC it is less economical to mine Bitcoin. This would limit the distributed nodes (miners) globally and allow a larger percentage of control to the dominant mining pools / farms.

The other scalability issue arises when Bitcoin runs out, eventually (currently predicted for 2140) Bitcoin’s supply will run out. Once this happens, miners will no longer receive rewards for completing blocks but instead will be given fees.

If miners decide that this is uneconomical for them, and use their computing power elsewhere the speed of transactions for Bitcoin will drastically slow down, rendering one of the fundamental values of a Bitcoin (speed) useless.

Proof of stake

Instead of all the miners competing to solve a block — which uses a lot of electricity, proof of stake preselects the validators to forge a block onto the blockchain.

How are validators (essentially the same as miners) selected?

1. Stake holding

The higher a validators holding in the cryptocurrency they are validating (stake), the higher their chance of being chosen to validate a block. If they owned more than 51% of the cryptocurrency, it is in their best interest to validate transactions ethically and accurately as the value of that cryptocurrency would directly affect the value of their majority holding.

As there is no block reward, validators are rewarded in transactional fees, this varies from coin to coin and will fluctuate with price.

2. Coin Age

Coin age is calculated by multiplying the number of coins held (stake) by the days the coins have been held.

The reason for this implementation is to more fairly distribute the opportunity to validate blocks (and therefore earn fees). Here’s an example of how this works

Validator A — 100 coins that a 10 days old.

Validator B — 50 coins that are 3 days old.

Validator A based on proof of stake and coin age is much more likely to be chosen as the validator of the next block. However, the block after would look something like this.

Validator B — 50 coins that are 3 days old

Validator A — 100 coins that are near 0 days old.

Person B would then be selected as a priority for verifying the next block.

This was a very simple explanation, and of course there are thousands of validators on the network.

It is worth noting that recent POS systems work on a bond basis where validators hold their cryptocurrency in a contract (like a deposit) . Preventing the lack of punishment for fraudulently attempting to manipulate a block, if they did this with a bond basis they will lose their stake. The contract also punishes those who are not active, therefore creating a obligation to fulfil the duty of a validator higher as the stake increases.

To conclude, the economic and environmental scalability issues that arise with the POW protocol are one of the main reasons why I believe POS is more sustainable and efficient. POS processes transactions quicker (as difficulty is much easier) and is structured to reward honesty and loyalty when validating blocks.

Thanks for reading this article,


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