Proof of Stake(PoS): What is it? Benefits of it over Proof of Work(PoW)

Consensus algorithms are a fundamental and indispensable component of a Blockchain network. The peers of a blockchain network utilize these mechanisms to reach a common agreement on the present state of the distributed ledger and, hence, the name Consensus Algorithms.

Besides, these algorithms bring a lot of other advantages such as participant commitment verification, leader designation, and data synchronization.

The consensus algorithms proffer security and reliability to a blockchain, the two principal features of the network.

They weed out fraudulent and insincere participants from the network by verifying their commitment in terms of energy or finances. They also designate the nodes responsible to add the following block of transactions to the chain and help maintain blockchains efficiently.

Although, this does not mean that all is well with these consensus procedures. They have their own set of trade-offs such as allowing centralization, high power consumption, and inequality.

There are various kinds of consensus algorithms such as Proof of Work, Proof of Stake, Practical Byzantine Fault Tolerance (PBFT), Proof of Burn, etc.

In this article, we will discuss two of the most popular consensus algorithms, Proof of Stake (PoS) and Proof of Work (PoW), and see why big platforms, like Ethereum, are shifting to the PoS algorithm from PoW.

We will see how PoS offers better safety, reliability, efficiency, and speed but most importantly, how it solves two of the main issues that mar Proof of Work, i.e. high power consumption and centralization.

What is Proof of Stake (PoS)?

The Proof of Stake mechanism works on the economic stake of the validators on the network. Hence, first, validators have to invest in the blockchain’s base cryptocurrency. Then, they have to lock some of their currency in the form of stakes. Once the stakes are placed, the process of proposing and voting for the next block starts.

Validators compute and propose a block they deem canonical and fit as the next block in the chain as per their calculation. Then the block that meets all the guidelines gets added to the chain and the validators of the block get rewarded.

There are various forms of PoS in which the rewards are assigned to the validators. However, two of the major ones are discussed below.

1. Chain-based Proof of Stake — In this algorithm, a validator is chosen pseudo-randomly during each time slot. The validator has the right to create a block that mandatorily points to a previous block to make a single growing chain.
2. BFT-style Proof of Stake — Here, BFT stands for Byzantine Fault Tolerance. In this flavor of PoS, validators have randomly conferred the right to propose blocks. However, the consensus on the valid block is achieved through a multi-round process. In this process, validators vote for a specific block in each round and ultimately agree on whether a given block is valid and should be part of the chain. Notably, the weight of each validator’s vote corresponds to the size of its stake.

The PoS is a wonderful alternative to existing algorithms and incentivizes validators for achieving consensus. It offers significant advantages such as security, reduced risk of centralization, and energy efficiency. Let’s discuss the advantages in detail.

Advantages of Proof of Stake

• Energy Efficient

According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin (which follows PoW) consumes around 110 Terawatt Hours per year which is almost equal to the energy consumption by Sweden. The questions are being raised about high energy consumption by blockchain especially those that utilize PoW. However, PoS is much more energy-efficient and utilize a fraction of the energy required by other algorithms. This is because it does not require heavy machinery to solve complicated puzzles like in the case of PoW. More on this in the later section.

• Maintaining Rarity

Since PoS make validation and mining easy on resource consumption, it does not necessitate a high rewarding system to encourage continuous participation by the validators. Moreover, it also creates room for lowering the reward over time to reduce the supply of the cryptocurrency.

• Discourage Centralization

PoS facilitate the utilization of mathematical models for egalitarian operations and discourages centralization of the system. It prevents the formation of cartels, in the rare event that they still form, it prevents them from acting in harmful ways. It also reduces centralization risks by offering linear scalability and polishing off any disproportionate advantages like better affordability of mass-production equipment like in PoW.

• Leave 51% Attack Needless

PoS has the ability to impose economic penalties for various forms of 51% attacks. It makes such attacks much more expensive than PoW, thereby, removing or reducing any form of gains that attackers assume.

What is Proof of Work (PoW)?

The Proof-of-Work consensus algorithm requires the network participants or miners to compete against each other. They have to solve highly difficult puzzles requiring extremely complex computation.

The first one to solve the puzzle gains the right to create and broadcast a new block over the network. Then, the other nodes audit the block individually and if the block conforms to all the standards and guidelines, it is added to the existing blockchain. The creator or block is rewarded with cryptocurrencies for utilizing its resources, in this case, electrical energy.

The process is called mining and the participants are called miners. The reason is that the energy and the resources required to complete the process can be regarded as a digital equivalent of mining precious metals in the real world.

Advantages of Proof of Work

• Encourages Renewable Energy

The high energy consumption forces the participants to look for cheaper and more efficient renewable resources of energy to reduce the high cost of production. Moreover, PoW inherently rewards overall efficiency i.e. higher energy efficiency and better technological performance. Leading to a healthier competition in both aspects. This has even led to a search for trapped energy and harnessing it for mining.

• Higher Security

This mechanism requires a higher initial hardware cost and recurring resources expenditure, thus, it is difficult and costly to attack. This can be compared to Proof-of-Stake where a single small upfront expense is enough to participate.

Proof of Stake vs Proof of Work: Pros & Cons

Originally published at https://www.queppelin.com on May 27, 2022.