Abstract

Proof of Work (PoW) and Proof of Stake (PoS) are the two most common consensus mechanisms, and mainstream cryptocurrencies use them to ensure their own network security.

Bitcoin uses proof of work to verify transactions and ensure network security. In addition, proof of work can prevent double-spend problems. The security of the blockchain is guarded by participants called "miners," who compete with each other using computing power to gain the right to confirm new blocks and update the blockchain. Successful miners are rewarded with Bitcoins by the network. As of December 2021, miners will receive a block reward of 6.25 Bitcoins for each successfully mined Bitcoin block, plus transaction fees.

The main difference between proof of work and proof of stake is the way in which block transaction verifiers are selected. Proof of Stake is the most popular alternative to Proof of Work and is a consensus mechanism designed to improve upon the limitations of Proof of Work, such as scalability and energy consumption issues. Participants in proof-of-stake are called "validators". They do not need to use powerful hardware devices to compete for the opportunity to verify blocks. They only need to stake (lock) the native cryptocurrency of the blockchain. The network then selects a winner based on the amount of cryptocurrency staked and rewards the winner with a percentage of transaction fees from the blocks they verify. The more tokens staked, the greater the chance of becoming a validator.

Introduction

In order to ensure the exchange of records in the blockchain. is effective. Among these, the Proof of Work (PoW) mechanism appeared earliest. This mechanism was created by Satoshi Nakamoto and is recognized as one of the most secure alternatives. Proof of Stake (PoS) followed and is now particularly common among altcoin projects.

In addition to Bitcoin, proof-of-work is also used in mainstream cryptocurrencies such as Ethereum (ETH) and Litecoin (LTC). In contrast, proof-of-stake is used for Binance Coin (BNB), Solana (SOL), Cardano (ADA), and other altcoins. It is worth noting that Ethereum will switch from proof of work to proof of stake in 2022.

What is Proof of Work (PoW) and how does it work?

Proof-of-Work (PoW) is a consensus algorithm used by the Bitcoin network and many other cryptocurrencies to prevent the double-spend problem. Satoshi Nakamoto proposed this concept in the Bitcoin white paper released in 2008.

Proof-of-work essentially determines the way for the Bitcoin blockchain to achieve distributed consensus. It verifies peer-to-peer transactions in a trustless manner without the involvement of third-party intermediaries.

In a proof-of-work network like Bitcoin, transactions are verified by miners. They are participants in the network and use significant resources to ensure the continued safe and normal operation of the network. Miners are also responsible for tasks such as creating and verifying block transactions. To gain the right to verify the next block, miners use highly specialized mining hardware to solve complex mathematical puzzles.

The first miner to successfully solve these mathematical problems wins the right to add the block to the blockchain and earns what is known as the block reward. Block rewards are composed of newly generated cryptocurrency and transaction fees. Depending on the network conditions, the amount of cryptocurrency in the block reward will also vary. For example, a miner who successfully mines a block from the Bitcoin blockchain will receive a reward of 6.25 Bitcoins and transaction fees for each block (as of December 2021). However, due to the halving mechanism, every 210,000 blocks (approximately four years), the number of new Bitcoins generated per block will be reduced by 50%.

If you want to learn more about the proof-of-work model, please read "What is Proof-of-Work (PoW)?" 》.

What is Proof of Stake (PoS) and how does it work?

Proof of Stake (PoS) is a consensus algorithm launched in 2011. It is an alternative to proof of work and aims to solve the scalability limitations of proof of work. Proof-of-stake is the second most popular algorithm, used by cryptocurrencies such as Binance Coin (BNB), Solana (SOL), and Cardano (ADA).

Although Proof of Work and Proof of Stake have the same goal of reaching consensus in the blockchain, Proof of Stake uses different methods to determine the verifiers of block transactions. There are no miners in a proof-of-stake blockchain. Proof-of-stake validators compete for block validation rights based on their individual cryptocurrency holdings, rather than relying on computer performance.

Participants can obtain block verification rights by locking a certain number of tokens in a specific blockchain smart contract. This process is called "pledge". The proof-of-stake protocol will then assign validators to validate the next block. Depending on the network, the selection process will be random or determined by holdings (stake amount). Selected validators are rewarded with transaction fees from the blocks they validate. Generally speaking, the more tokens staked, the greater the chance of being selected as a validator.

For more information, please read "Detailed Explanation of Proof of Stake (PoS)".

The difference between Proof of Work (PoW) and Proof of Stake (PoS)

Although both are guaranteed Consensus mechanism for blockchain network security, but there are certain differences between the two. Obviously, the main difference between Proof-of-Work and Proof-of-Stake is the way chosen to verify new transaction participants. To give you a clearer understanding, let's take a look at the following table:

Is Proof of Stake better than Proof of Work?

Proof-of-Stake proponents believe that Proof-of-Stake has advantages over Proof-of-Work, especially in terms of scalability and transaction speed. Some argue that proof-of-stake tokens are less harmful to the environment than proof-of-work. In contrast, many proof-of-work proponents believe that proof-of-stake, as a newer technology, has yet to be determined about its potential in network security. The proof-of-work network requires the support of a large number of resources such as mining hardware and electricity. As a result, the cost of attack will be higher. This is especially true for Bitcoin, the largest proof-of-work blockchain.

As mentioned earlier, Ethereum (ETH) will switch from proof of work to proof of stake when it upgrades to Ethereum 2.0. Ethereum 2.0 is the long-awaited upgrade to the Ethereum network, designed to improve network performance and solve scalability issues. After Ethereum implements Proof of Stake, all users holding 32 Ether coins can participate in staking to become a validator and receive rewards.  

Is Proof of Stake better than Proof of Work? What is the reason for the second-largest cryptocurrency by market capitalization to adopt this new consensus mechanism?

Centralization risk

Mining in the proof-of-work blockchain requires repeated use of computing power Scramble the block data until you find an effective solution. Finding solutions is increasingly challenging for current mainstream cryptocurrencies. The process of exhaustively computing hashes requires expensive hardware and electricity.

Therefore, some miners prefer to concentrate mining resources into mining pools to increase the chances of obtaining block rewards. Some large mining pools invest millions of dollars and control tens of thousands of application-specific integrated circuit (ASIC) mining hardware in order to generate as much hash power as possible.

As of December 2021, the top 4 mining pools control nearly 50% of the total Bitcoin hash power. When mining pools are monopolized, it is extremely difficult for cryptocurrency enthusiasts to mine blocks on their own.

So, how decentralized is mining? For one thing, no single entity has complete control over network validation. If this happens, a 51% attack may occur and the network will lose value. Some would argue that while mining is still decentralized, it is no longer to the same degree. In a sense, mining equipment and energy producers still control the lifeblood of mining, reducing the overall degree of decentralization of the workload proof blockchain.

The proof-of-stake consensus mechanism uses a different approach, replacing mining capabilities with staking. This mechanism lowers the barriers to entry for individuals to confirm transactions, reducing reliance on location, device, and other factors. Staking is simply determined by the number of tokens held.

However, most proof-of-stake networks require running validator nodes before they can start confirming transactions. This may be expensive to run, but it is not worth the cost of several mining machines. Users entrust tokens to specific verifiers, forming a model similar to a mining pool. Therefore, while it is easier for ordinary users to participate in proof of stake, it is still susceptible to centralization issues like mining pools.

Security risks

In addition to centralization risks, the top four mining pools control the Bitcoin network Most of the hash power, which will increase the risk of 51% attacks. A 51% attack means that a malicious individual or organization may launch a security attack on the blockchain system after controlling more than 50% of the total hash power of the entire network. Attackers will completely control the blockchain consensus algorithm and perform malicious actions for personal gain, such as causing double-spend problems, rejecting or changing transaction records, or preventing others from mining. However, given the size of the Bitcoin network, the chances of such an attack occurring are extremely slim.

Relatively speaking, if someone attacks a proof-of-stake blockchain, they need to own more than 50% of the tokens in the network. This would result in increased market demand and token prices, and would cost tens of billions of dollars. Even if a 51% attack is successfully carried out, the value of the tokens staked by the attacker will plummet due to the network being compromised. Therefore, cryptocurrencies that use proof-of-stake consensus, especially if they have a large market capitalization, are almost immune to 51% attacks.

Disadvantages of Proof of Stake

Many people believe that Proof of Stake is the optimal alternative to Proof of Work, but it is worth noting Yes, the proof-of-stake algorithm also has flaws. Affected by the reward distribution mechanism, the more assets a validator stakes, the more likely they are to get the opportunity to verify the next block. The more tokens a validator accumulates, the more tokens they can stake and earn, so many people accuse this of "the rich getting rich". Since proof-of-stake blockchains typically assign governance rights to validators, these "richer" validators also affect the voting power of the network.

Another concern is that cryptocurrencies with smaller market capitalization will face security risks if they adopt proof of stake. As mentioned above, more popular cryptocurrencies such as Ethereum or Binance Coin are virtually immune to 51% attacks. However, smaller digital assets with lower values are more vulnerable to attacks. An attacker who acquires enough tokens can gain an upper hand in competition with other validators. As long as they are frequently selected as validators, they can take advantage of the proof-of-stake system. They then stake their earned rewards again to increase their chances of being selected in the next round.

Summary

Both proof-of-work and proof-of-stake are important in cryptocurrency Having a place in the ecosystem, it is difficult to judge which consensus protocol is more effective. Due to the high carbon emissions during the mining process, workload proof has been criticized, but it is still a recognized security algorithm for protecting blockchain networks. Nonetheless, as Ethereum shifts from proof-of-work to proof-of-stake, the proof-of-stake system will gain traction with more new projects in the future.