POW vs. POS: Difference Between Proof-of-Work & Proof-of-Stake Protocols

We’ll look at the two methodologies from many perspectives, including consistency, power consumption, participation, and reward distribution systems, to help you better grasp the differences between them.

The Importance of Consensus on Blockchain

Decentralization is the most significant benefit of blockchain. It’s a distributed database that’s maintained collaboratively by the computers participating, known as “nodes.” All nodes are ledgers, which means they keep track of the full blockchain’s transaction history. Unloading any central server will not harm the network.

A protocol program connects records of information called “blocks,” and none of the current blocks may be erased or modified. The sole way to update the blockchain is to add a new block, which can be done by any node without the need for a central command.

When a node breaks the specified rules and generates a block, the rest of the network ignores it. There will be contention in the community if the incompatible node continues to build non-compliant blocks and other nodes begin to create blocks on top of the non-compliant blocks. To prevent incompatible nodes from forming so-called forks, a consensus mechanism is required.

A distributed denial of service (DDoS) attack can be used by malicious hosts to overload other hosts on the network. Such nodes have the potential to perform erroneous actions. To avoid this, a consensus process is also required.

PoW’s Sequence

Miners who prefer PoW-based crypto-blockchains (such as Bitcoin) compete to add the next block to the chain, consuming significant computational power and energy resources.

When there is no guarantee that the last block added will be the last one in the chain, there is a rule known as the “longest chain rule.” Another miner may be able to add two consecutive blocks faster than competitors, invalidating the preceding block. One chain develops longer than the previous one in this instance. As a result, bitcoin miners must wait for at least six transaction confirmations (or the inclusion of six blocks) before the transaction is considered complete.

PoS’s Sequence

The PoS method, which is one of the closest alternatives to PoW, sorts the blocks in chronological order one by one without requiring any physical effort or energy-intensive processes. In addition, there is no competition among validators, or “auditor” participants.

In PoS, a single block is generated in one or two seconds, rather than 10 minutes as in Bitcoin.

Consumption of Energy

Satoshi Nakamoto could not have envisioned the scope of his brainchild and how energy-intensive the operations associated with it would be when he created Bitcoin.

There are already a large number of industrial mining “farms” dispersed over the world, which are run by ASIC miners who are driven to obtain bitcoin rewards utilizing hash functions. Individual mining on a personal computer is a thing of the past, we can say.

Power Consumption in PoW

Miners look for a unique random nonce by solving difficult mathematical calculations (a process known as hashing) in order to obtain the permission to generate a new block and add it to the chain. Hundreds of thousands of pieces of specialist ASIC equipment are required to win this race, which necessitates enormous energy expenses.

The amount of energy consumed by Bitcoin mining alone is currently similar to that of a medium-sized country (for example, the level of Norway or Argentina). Bitcoin’s energy use would rank among the top 30 in the world if it were a country! BTC’s annual energy consumption is estimated to be around 121 terawatt hours, according to University of Cambridge experts (TWh).

However, I would not describe it as a pointless “sacrifice,” but rather as a method for securing the cryptocurrency blockchain. According to another Cambridge study, renewable sources account for 39% of hashing energy, as proven by software development spearheaded by the Crypto Climate Accord program. Yes, Bitcoin still requires a lot of energy, but it can be generated by wind and solar power facilities.

Power Consumption in PoS

There is no competition in PoS networks to propose a new block depending on power consumption. However, PoS miners must maintain their computers and give Internet connectivity on a regular basis, which incurs expenditures.

PoS blockchains are less expensive to set up since they use less energy. However, pool operators and validators can still gain because transaction throughput is significantly higher, and network managers are still rewarded even with lower transaction fees. In terms of stability, there appears to be no alternative to PoS at this time.

System of Rewards

Distribution of PoW Rewards

Miners earn a payment for each block in the Bitcoin network, which consists of a transaction fee and a predetermined price for a new block. However, after mining a set number of blocks, this sum is half every four years. Halving (halving, “halving,” “halving”) is a procedure that is documented in the Bitcoin protocol’s source code.

Bitcoin inflation is reducing over time as a result of the halving. It will eventually approach 0%, which means that the miners will extract all of the 21 million “digital currencies” BTC currently in circulation.

Cutting the number of “coins” utilized for rewards in half either doubles the price of bitcoins or raises transaction fees; otherwise, miners would lose money and shut down their equipment.

This is because the block size is fixed, and while improvements like the Schnorr authentication mechanism will assist increase the existing TPS, they will not be sufficient for the expanding number of users.

The current Ethereum throughput is 25 t/s, however with the deployment of PoS and the completion of sharding, hundreds, if not thousands, of transactions per second will be possible.

PoS reward distribution

PoS networks reward users that contribute a valid block to the blockchain. The rewards differ from one blockchain to the next.

Some are merely transaction fees, while others are given from a separate budget for the first few years, until the network is more “run-in” and able to deliver enough transactions to support the validator costs.

Because the degree of inflation or deflation of PoS “digital currency” varies by protocol, and even chain governance can alter over time, I won’t go into more detail here.

While only miners receive rewards in the form of new “coins” and transaction fees in PoW, it can be received by any user in PoS, including those who do not participate in the consensus and are not part of any pool, as well as “Hodlers”. HODL is commonly misinterpreted as an abbreviation for “hold on for dear life” – “purchase and hold,” “hold at all costs,” but the concept actually emerged from a highly successful and amusing misspelling in the word hold). As a result, the distribution of tokens in a Proof-of-Stake system is more egalitarian.

Summarizing PoS and PoW

The PoW-PoS duel is thrilling. A successful blockchain network must find a way to balance security, decentralization, and scalability.