How Is Proof of Work Different From Proof of Stake?

How Is Proof Of Work Different From Proof Of Stake?

By Kriss
Published on: July 21, 2021

Would you like to know the difference between Proof of Work and Proof of Stake argument? Or maybe you just want to know a little more about how to mine popular blockchains that use Proof of Work? You have come to the right place.

The Basics

A Proof-of-Work system was created by Satoshi Nakamoto when he was building Bitcoin, the first-ever cryptocurrency. Proof of Work is based on an advanced form of mathematics called cryptography. This is why digital coins like Bitcoin and Ethereum are called cryptocurrencies. Cryptography uses mathematical equations that are so difficult that only powerful computers can solve them. No equation is ever the same, meaning that once it is solved, the network knows that the transaction is authentic. Even though Proof of Work is an extraordinary invention, it still needs significant amounts of electricity and it is also very limited in the number of transactions it can process at the same time.

Every time a transaction is sent, it takes about 10 minutes for the network to confirm it. Furthermore, the Bitcoin blockchain can only handle about 7 transactions per second. Interestingly Ethereum developers made a few changes to the original code, which allowed the network to process transactions in just 16 seconds. Still there is a problem with scalability- the maximum amount of transactions that the Ethereum blockchain can process is 15, which is considerably lower than the network needs.

Through this system, Nakatomo’s Bitcoin white paper – published back in 2008 – allows trustless and distributed consensus. A trustless and distributed consensus system means that it is possible for transactions to be verified without any third party being involved. When you use traditional payment methods (e.g. Visa, Mastercard, PayPal, banks) you need to trust in third-party services. They keep their own private register which stores transaction history or account balances of each customer. But with Bitcoin and a few other cryptocurrencies, everyone has a copy of the ledger (blockchain), so no one has to trust third parties because anyone can directly verify the information written.

Proof of Work - ABC’s

Every block contains different transactions within it, which must each be independently verified. For the Bitcoin network to achieve this without a third party, somebody must use their computational power to solve a cryptographic algorithm, otherwise known as Proof of Work.

Once it is proved, not only is the transaction validated, but it is also placed to the public blockchain for everyone to view. You might be wondering why somebody would buy hardware and consume lots of electricity just to help confirm Bitcoin transactions. Well, the answer is that people are rewarded with additional Bitcoin (or whichever cryptocurrency Proof of Work is confirming) for their approval. The important thing to understand is that not everybody gets a reward. Thousands of individual devices all compete to become the first to solve the cryptographic algorithm. Whoever gets there first, wins the reward.

One of the major issues with Proof of Work is that it is not a fair system, because those with the most expensive, powerful hardware devices or the more hardware devices you have, will always have the advantage of winning the reward.

Proof of Stake - ABC’s

The Proof of Stake system uses a different process to confirm transactions and reach consensus. It still uses a cryptographic algorithm, but the objective of the mechanism is different. While Proof of Work rewards its miner for solving complex equations, in Proof of Stake, the individual that creates the next block is based on how much they have staked. To simplify, the stake is based on the number of coins the miner has for the particular blockchain they are attempting to mine. However, technically individuals are not mining. Also there is no block reward. While Bitcoin, which uses the Proof of Work model, awards a block reward every time a new block is verified, those who contribute to the Proof of Stake system simply earn the transaction fee.

Firstly, to have the opportunity to validate transactions, the user must put their coins into a specific wallet. This wallet freezes the coins, meaning that they are being used to stake the network. Most Proofs of Stake blockchains have a minimum requirement of coins required to start staking, which of course requires a large upfront investment. For example, to validate transactions for the Cardano network, you would be required to stake and freeze a minimum amount of 1000 Cardano coins.

If you have staked the required minimum, your chances of winning the reward (transaction fees) is related to the total percentage of coins you hold. For example you stake coins to earn some Proof of Stake rewards:

The blockchain has a total of 1000 coins in circulation.
You stake 100 coins.
This means that you have stake 10% of the total circulation.
Basically means that you have a 10% chance of winning transaction fees.

Those individuals who stake are going to want to help keep the network secure, if you try to hack or harm the process, then you would lose the entire stake. This is why this system works well. The more you stake, the more you earn, but at the same time you might lose more if you go against the system.

Proof of Work VS Proof of Stake

Proof of Work requires ALL of its miners to attempt to solve a complex sum, with the winner determined by the person who has the most powerful/quantity of hardware devices.
Proof of Stake model randomly chooses the winner based on the amount they have staked.

Proof of Stake is so much better than Proof of Work due to those reasons:

Centralization – this means that centralized organisations are buying thousands of devices which are used to generate the highest power of mining. It allows people to mine their resources together to give them the greatest chance of solving the mathematical equation first and have a better chance to win the reward.

Electricity Consumption – Proof of Work blockchains use large amounts of electricity, because miners have to solve very complicated mathematical equations. A recent study found that the total amount of electricity required to keep the Bitcoin network functional is more than the amount used by more than 159 countries. On the other hand, Proof of Stake networks use substantially less electricity.

51% attack – A 51% attack is when a single cryptocurrency miner or group of miners gains control of more than 50% of a network’s blockchain. Such attacks are one of the most significant threats for people who use and buy cryptocurrencies.

If that happened in a Proof of Work blockchain like Bitcoin, it would allow the person to make changes to a particular block. If this person was a criminal, they could alter the block for their gain.

When using a Proof of Stake consensus mechanism, it would not be profitable to attempt to perform a 51% attack. For this to be achieved, the thief would need to stake at least 51% of the total amount of cryptocurrency in circulation. The only way they could do this is to purchase the coins on the open market. If they decided to buy this amount, then the value of the coin would increase also. As a result, they would be spending outstandingly more than they could gain from the strike. Not only this but once the rest of the network had realized what had happened, the bad guy would lose all of their stakes.

Disadvantages of the Proof of Stake system

The first problem when discussing Proof of Stake VS Proof of Work is the issue that Proof of Stake helps the rich get richer. This is due to the more coins you can afford to buy, the more coins you can stake and have a better chance to earn from those coins. If you have enough money that minimum requirements (most people do not have) do not affect you then you can guarantee yourself a very good return on your investment. Which basically means that those who have more money will always have the best chance of winning the reward, making the rich richer. This is against The Robin Hood Effect Theory. However, it does not differ from the Proof of Work consensus mechanism, where wealthy miners can simply purchase the best and most powerful mining devices.

People also have concerns that Proof of Stake allows transactions to be verified across multiple chains, which Proof of Work does not. This can lead to an issue if a hacker is able to perform a double-spend attack. This occurs when somebody transfers funds to someone else, but the funds are spent again before the transaction is confirmed. Under normal circumstances, such an attempt would be prevented by all of the other miners on the network. Furthermore, because Proof of Work only allows devices to mine on one chain, the dishonest chain would simply be rejected. Meanwhile, with a Proof-of-Stake model, it doesn’t cost forgers any money to mine on multiple chains. This could allow for someone to carry out a double-spend. Otherwise known as the “nothing at stake?” scenario.

Conclusion

Thanks to a Proof of Stake system validators do not have to use their computing power because the only factors that influence their chances are the total number of their own coins and the current complexity of the network.

Proof of Work is the current way to mine Ethereum, Bitcoin, Dash, and some other cryptocurrencies. However, you should now be fully aware of the many issues associated with Proof of Work. This includes the amount of electricity it requires, the centralization of power that mining pools now have, and the threats of a 51% attack.

Kiara Sofia Smith

My current focus is blockchain technology and cryptocurrency. One could even call me a blockchain “enthusiast.” I have worked for almost a decade on several financial projects related to the stock market news, fundamental research and technical analysis for several blogs.