As we highlighted in our blockchain technology guide, developers can opt for different consensus mechanisms. Proof-of-Work and Proof-of-Stake are two popular options, yet they differ significantly. Each option has benefits and potential drawbacks.
Achieving Consensus is Crucial
In the cryptocurrency world, blockchains cannot operate without a specific consensus mechanism. It is this mechanism that ensures miners and nodes can safely process data without compromising the network. Without these rules and guidelines, cryptocurrencies such as Bitcoin would not be able to function.
Consensus rules will apply to any implementation of blockchain technology. A distributed ledger of data cannot expand or gain security if users can’t add new data. Both Proof-of-Work and proof-of-Stake can serve as a consensus algorithm, albeit they have very different rules and requirements.
Validating Via Proof-of-Work
The concept of Proof-of-Work as a consensus algorithm is often referred to as “mining”. Network users need to solve tricky mathematical puzzles to create new blocks containing data. This process is also necessary to validate any transaction on that blockchain. To solve complex algorithms, users can rely on their computers or buy specific hardware – known as ASICs – to make the process faster.
While most people may think mining is a profitable business model, that isn’t always the case. Many people who mine Bitcoin or alternative cryptocurrencies will spend a lot of money for a chance at receiving a block reward. The money spent can outweigh potential earnings, making Proof-of-Work mining less attractive.
How Does It Work?
Under the hood, this consensus mechanism is relatively easy to comprehend. Proof-of-work requires the mining of a network block and receiving a reward for doing so. As more miners attempt to find blocks, the mining difficulty will increase to give all participants a fair chance. A Proof-of-Work consensus mechanism creates competition among miners, as only the first one capable of solving the complex mathematical puzzle will receive the reward.
The downside to Proof-of-Work is how it will require significantly more advanced mining hardware to remain competitive. As competition and mining difficulty rap up, one’s hardware will become “less efficient” at competing. Addressing this issue can be done by adding more computational power. However, that new hardware will consume more electricity, increasing the price of mining and reducing one’s potential profit.
Partaking in the mining effort requires access to cheap electricity to keep overall costs down. Otherwise, the cost of electricity would spiral out of control quickly. These requirements create a callous balancing act but also highlight a fundamental flaw in Proof-of-Work. The electricity consumption associated with this consensus mechanism can impact our climate, according to a recent Earth.org article.
Validating Via Proof-of-Stake
Another option to achieve network consensus in a blockchain environment is by exploring Proof-of-Stake. Opting for this approach is entirely different from Proof-of-Work, and a far less proven method of securing a blockchain. That doesn’t mean this option should not be put to fair use, as there are certainly benefits to exploring this option.
One often-heard criticism is how Proof-of-Stake leads to more centralization. The consensus mechanism rewards users with the most significant stake more often than others. A small group of users can own the majority of assets on this blockchain and control the network. If that group of users decides to act nefariously, it can have catastrophic complications for the entire blockchain.
How Does It Work?
Unlike mining, users are “staking” their share of the coin supply to validate transactions. Proof-of-Stake removes the need for mining entirely, creating a more sustainable model. All network users who stake coins can validate a block. Those who have a higher “stake” have a better chance of validating a block and earning the subsequent reward.
Validators who perform these tasks do not receive traditional rewards like a Proof-of-Work system. Instead, they collect transaction fees, which make up the “stake reward”. One can argue Proof-of-Stake is a more efficient solution to reward network participation, as it has no hardware requirements. However, securing a blockchain through Proof-of-Stake requires significant participation, which may prove challenging to achieve.
Is One More Secure Than The Other?
Any blockchain ecosystem must ensure the network is as secure as possible. Whether that is through Proof-of-Work or Proof-of-Stake, the result must remain the same.
Currently, there is strong favoritism toward Proof-of-Work. Misbehaving as a miner or node will result in being cut off from the network either technically or economically. Propagating an attack against a Proof-of-Work blockchain is a costly endeavor, often more expensive than the potential financial reward may be.
In this regard, it is much cheaper to attack a Proof-of-Stake blockchain – in theory. Punishing misbehaving users is crucial. Otherwise, the entire blockchain is at risk. As Proof-of-Stake has received multiple upgrades over the years, it has become easier to cut off malicious actors altogether. That said, there are still questions as to how “bulletproof” Proof-of-Stake is. The ongoing Ethereum 2.0 upgrade will offer some valuable insights in the coming months.
Both Proof-of-Work and Proof-of-Stake are viable consensus mechanisms to help secure any blockchain today or in the future. Either solution has its advantages or drawbacks. It all comes down to how blockchain developers decide to implement the consensus mechanism of their choice. Protecting the network and users is paramount.
As both consensus algorithms focus on preventing cheating while being accessible to all types of users, it is difficult to determine which is “better”. The trade-off between being cost-effective and decentralization is a tough balancing act.