PROOF OF WORK VS PROOF OF STAKE

Proof of work and Proof of stake are two different alggorithms/concepts, which form the bedrock in order to verify the transactions on a distributed ledger system, called “Blockchain”.

There has been a lot of discussion about both the algorithms and others like delegated proof of stake. However, we’ll be primarily focusing on these two in this post.

PROOF-OF-WORK

As the name suggests, proof of work is the protocol in which the transactions are validated on the basis of “Proof of Work”, that is, how much work has each individual miner contributed towards the verification of the underlying crypto currency in the transaction.

Woah! That was a bunch of jargon, so let me simplify a bit.

Let us take the example of Bitcoin as it is one of the currencies which makes use of the Proof of Work protocol (another popular one is Ethereum).

Each block in the Blockchain network contains a bunch of transactions, which have to be verified before they can be uploaded to the network. The people who validate these transactions are known as Miners.

When miners come together to validate transactions, they form a group which is known as a ‘mining pool’. To validate a transaction, the miner (or a mining pool) gets the underlying cryptocurrency (which in this case would be Bitcoin) as the reward.

How is it determined which mining pool should be given the opportunity to solve the problem?

It is done on the basis of the “Work” each pool can perform. What happens is that, to validate a block of transactions, a cryptographic problem is to be solved using complex mathematical computations. To solve this problem, miners use advanced hardware with maximum hashing rate.

Bitcoin Hashing Rate

The higher the hashing rate, the higher is the chance of the miner to receive a problem to solve and earn rewards, which in the case of Bitcoin, is BTC itself (or a transaction fees in some cases).

PROOF OF STAKE

‘Proof of Stake’ is another protocol for validating transactions and was suggested as an alternative to Proof of Work due to some of its disadvantages that we will talk about soon.

In this protocol, the people who validate the transactions are called as “Validators”.

Anyone who wishes to validate a block of transactions has to deposit the concerned currency for which he/she is willing to validate the transactions.

Let us take the example of NEO, which runs on the Proof of Stake protocol in order to explain the scenario. Any person who wants to validate transactions has to deposit NEO, which gets locked on to the network as long as you remain a validator on the network.

When the person validates the transactions, the block is pushed on to the blockchain and the validator gets a Reward, which in-turn is equal to the transaction fees of all the transactions on that block.

Thus, unlike proof of work, where the miner gets the cryptocurrency in transaction itself, here the validator gets cash as the reward. However, if the network concludes that the block which you validated is wrong, then all your deposit (Stake) will be lost.

When you do not want to be a validator anymore, the network releases your stake after making sure that all the blocks that you validated are actually valid.

KEY DIFFERENCES

Terms used:

Miners and Validators

In the Proof of Work protocol, the person who validates the transactions is called a Miner, whereas in case of Proof of Stake protocol, he/she is called a Validator.

Reward:

The miner in case of the PoW protocol receives the underlying crypto currency which is being transacted. On the other hand, in case of PoS, the validator gets the transaction fees as the reward.

For example, Bitcoin miners get 12.5 BTC to verify one block whereas Ethereum miners get 5 ETH to verify one block (as of today).

Chance of Mining:

The probability of a miner getting the opportunity to validate a transaction in the proof of work protocol depends upon the hashing rate of the hardware possessed by the miner.

In proof of stake the probability of a validator getting the opportunity to validate a transaction is the amount of stake invested by him/her.

51% Attack:

51% Attack is an attack when the miners control 51% or more of the total computing powers and become so big that they can approve or reject any transaction. This can be done in both the protocols that we are talking about but proof of stake makes the 51% attack virtually impossible.

As the control is defined by hashing power of the pool, the resulting pool will have all the control and they may start to approve fraudulent transactions or block money unnecessarily in the PoW protocol. In the PoS protocol, to have 51% control any validator will have to invest huge sums of money into that currency (51% of total bitcoin market cap is 73 billion dollars).

Thus, performing a 51% attack is not possible in the PoS protocol without incurring massive losses.

Environmental Friendly:

The PoW protocol consumes a lot of energy. About 1 million USD is paid to incur the costs of electricity and hardware to mine Bitcoin and Ether per day. Further, to change one day of Bitcoin’s transactions (which equals about 144 blocks) you would need 1.2 GW of electricity.

Also for mining, miners have to buy ASICs, that is, Application Specific Integrated Circuits and on top of that they need fans to cool down all their hardware to prevent it from burning out. However, the PoS protocol does not require that much of energy.

Investment by miners:

The investment done by miners in the Proof of Work protocol is external to the network and mainly includes the fixed cost of buying hardware along with the massive electricity costs.

The investments done by the validators in the Proof of Stake system is internal to the network which includes the investment in the currency for which the validator is verifying the transactions.

CONCLUSION

Both the protocols have their own pros and cons. The PoW protocol is quite expensive as it involves massive energy consumption and setting up of hardware devices in order to mine the cryptocurrencies.

On the other hand, the PoS protocol may seem to be a much more feasible solution.

However, the protocol is not free of criticism. One of the major concerns is that it makes the rich even richer as the validators who invest the maximum amount get an opportunity to verify the maximum amount of transaction, which in turn means more transaction fees for them.

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