Proof of Stake vs Proof of Work
Each cryptocurrency has its own blockchain which uses a specific kind of consensus algorithm to organize transactions in the blockchain ‘database’. The original consensus algorithm used in Bitcoin is Proof of Work, as described in my previous post What is Blockchain and How Does it Work? Proof of stake is one alternative algorithm to proof of work (used in Bitcoin alternatives/altcoins). The battle between proof of work aka POW and proof of stake aka POS is raging. I’m placing my bets.
Is proof of stake better than proof of work? In my opinion, yes. Here’s why:
A Refresher on Blockchains and Proof of Work
Blockchains are essentially distributed ledgers created for the storage of data (Read more about how blockchains work here). In cryptocurrencies, they are used to store transaction information, verifying their accuracy and ordering them chronologically. Because the blockchain is distributed with many participants on the network, there has to be a way of deciding who gets to write the next set of transactions, so that there is only one unique blockchain. There has to be what is called distributed consensus. When the first cryptocurrencies were created, proof of work was this method of creating distributed consensus, by having special nodes called miners compete to solve a cryptographic problem. This solved the problem of needing honest nodes to validate transactions, because there was a method of competition to select who writes the next block, and then the rest of the network could also verify that the recorded transactions were true after the work had been completed. Incentive was also provided to the miners in the form of a block reward, or creation of a new token/coin on the blockchain, when a new block was written.
Disadvantages of Proof of Work
This proof of work method of distributed consensus has some disadvantages that are increasingly becoming a problem in the cryptocurrency world. These include a concentration of mining power which defeats the goal of decentralization of cryptocurrencies as well as the environmental impact which is still in its early stages if true cryptocurrency adoption emerges in the future. Centralization comes in the form of mining equipment manufacturers being limited to a few companies, the fact that only certain people can afford mining equipment, that mining is concentrated geographically, and that mining pools can now overtake the network and write transactions in their favor if they choose to or deny service to others.
The high electricity costs resulting from proof of work mining is only expected to increase as cryptocurrency adoption grows, and will still add a hefty weight to the transaction fees if there are no block rewards in the future. In the case of Bitcoin, where mining fees will eventually be reduced to zero, there is also the issue of less incentive for miners to remain loyal to the network when mining another cryptocurrency may produce greater profits. Loyal and dedicated nodes are necessary to secure the blockchain and provide distributed consensus.
These disadvantages of proof of work mining have been known for a long time, but many of the problems were not immediate before the scaling of cryptocurrency networks to what they are today. It is important to note that proof of work has its advantages in that it solved the problem it was created for, namely that of getting honest nodes to validate and record transactions. Due to some of its disadvantages however, another alternative called proof of stake has arrived that can provide distributed consensus just as well, if not better.
What is the Proof of Stake Alternative?
For proof of stake cryptocurrencies, instead of having miners compete through solving a cryptographic problem, the next node to write the block is chosen depending on their proof of ownership or proof of stake in the network. There is some variety in how exactly this is determined, but the amount of stake is generally dependent on the amount of coins a holder has as well as the length of time they have been participating in the network. So instead of the probability of being chosen to write the next block being depending on mining power, the probability is dependent on the holder’s ‘stake’ or investment, meaning amount and time in the network. These nodes are called stakers or foragers and new coins are ‘minted’ rather than mined’.
The effect of this on solving the centralization and environmental issues of proof of work coins like Bitcoin, is significant. Many proof of stake coins began as proof of work coins and then decided to switch to proof of stake. Examples of proof of stake coins include Peercoin, Lisk, NXT, particl. Ethereum is also on its way to becoming a proof of stake coin. There are also delegated proof of stake coins which are not to be confused with regular proof of stake coins and those have a slightly different system, which I will not get into here.
Possible Advantages and Disadvantages of Proof of Stake
The first obvious issue that a proof of stake system of distributed consensus solves is that of reducing electricity costs. Proof of stake blockchains do not need its validators to initially purchase and update expensive mining equipment. Proof of stake also requires more loyalty on the part of the stakers than proof of work does from its miners. Proof of stake can also give rise to the monopoly issue, created through wealth disparities or mining pools, as large holders have greater chances of earning more. However, it is more difficult for someone to own 51% of the coins on a network due to prohibitive costs than for someone to have 51% of the mining power, and thus become a dishonest node. This scenario of sufficient mining power being concentrated for an attack to occur, has already been reached and its negative effect has only been mitigated due to the choice of mining pools, requiring trust. The cost to invest 50% of bitcoin’s market cap, not assuming the price will go up as someone buys that much, is far greater than the cost to buy the mining equipment to achieve 51% of the mining power. It is also more likely for an individual with concentrated power on the network to use it benevolently, in the case of proof of stake, because their major investment is the coin itself, and reducing trust by double spending or denying service, would negatively impact their own capital.
There are also variations on how proof of stake can be implemented to ensure some distribution for how often a staker gets to write to the blockchain based on how recently they did it. And the likelihood of a node being chosen also depends on its time invested not only amount. Other advantages of proof of stake include lower transaction fees due to lower hardware and software costs to keep the network running, faster validation times, and a smaller chance of honest nodes leaving as miner rewards are reduced overtime. There is a lower likelihood of over-reaching governments being able to create prohibitive barriers to entry, such as needing a license to mine, since only running software is less conspicuous than running specialized mining equipment.
So, of proof of stake vs proof of work, which is better?
Which is Better, Proof of Stake vs Proof of Work?
There are avid proponents of proof-of-work, and this is an ongoing debate. There are likely to be trade-offs rather than absolutes with the implementation of any system. I am partial to proof of stake, as this is the consensus algorithm used in Particl. Understanding that the power and promise of blockchain technology lies in its decentralized nature, as opposed to the centralized institutions of today, methods of decreasing centralization through proof of stake vs proof of work, or other consensus algorithms are more likely to succeed in the long run than only relying on proof of work as it exists today.
Watch the video version of this article here.
Vitalik Buterin on the original proof of stake question and implementation by Sunny King https://bitcoinmagazine.com/articles/what-proof-of-stake-is-and-why-it-matters-1377531463
Arguments against proof of stake:
Other kinds of consensus mechanisms: https://btcmanager.com/welcome-to-the-world-of-blockchain-consensus-protocols/?q=/welcome-to-the-world-of-blockchain-consensus-protocols/&