Comparative Analysis of the Proof-of-Work (PoW) vs Proof-of-Stake (PoS) consensus mechanism

One of the fundamental characteristics of a decentralized network is that no single entity has majority administrative control. This, therefore, implies that there needs to be some form of consensus mechanism amongst the different actors of a decentralized system, in order to establish a unified agreement regarding the current state of the network, since there is no central deterministic entity. A blockchain consensus mechanism is therefore described as a procedure by which all the nodes or peers of a network are able to reach a common agreement regarding the present state of the distributed ledger, thereby establishing trust between unknown peers in a distributed computing environment. Consensus mechanisms are essential in enhancing the security of decentralized networks as it aids in preventing malicious activities such as double spending which could consequently diminish the integrity of the network. This is fundamentally because a consensus mechanism ensures that every new block that is added to the blockchain is valid and has been generally agreed upon by all the nodes within the blockchain network. Thereby, enhancing the immutability, security, and transparency of records within the blockchain.

There are various mechanisms for achieving consensus within a blockchain network, some of which includes the: Proof-of-Work (PoW), Proof-of-Stake (PoS), Proof-of-History (PoH), Proof-of-Activity (PoA), Proof-of-Importance (PoI). However, this study would specifically focus on the comparative analysis of the two main blockchain consensus mechanisms which are the Proof-of-Work (PoW) and Proof-of-Stake (PoS).

POW

The Proof-of-work mechanism was initially introduced in 1993 as a way of preventing DDoS attacks and other security breaches and was later re-introduced in the Bitcoin whitepaper as a consensus mechanism for validating transactions and broadcasting new blocks on the blockchain.

Proof of Work (PoW) fundamentally involves solving complex cryptographic problems which resultantly leads to block rewards. To maintain network security, new blocks are validated by network members (miners) solving complex mathematical puzzles. These puzzles are difficult enough to prevent malicious behaviour, such as a miner attempting to validate a fraudulent transaction.

Consequently, each validated block contains a blockhash which represents the work that has been done by a miner, which is why this consensus mechanism is termed Proof-of-Work because miners provide proof for the work done which is then validated before proposing new blocks.

The diagram below provides a graphical illustration of the Poof-of-Work consensus mechanism.

Source: Proof-of-Work (Capital.com)
Source: Proof-of-Work (Capital.com)

POS

The Proof-of-Stake (PoS) consensus mechanism which is presently utilized by most of the Layer One (1) blockchains is commonly dubbed as an “efficient” alternative to the Proof-of-Work (PoW). However, the technical and structural ramifications of the Proof-of-Stake (PoS) significantly differ from that of the Proof-of-Work.

In the Proof-of-Stake (PoS) consensus mechanism, instead of investing in hardware (ASICS) infrastructures for mining, validators invest in the platform tokens of the underlying blockchain by locking up some of their coins as their stake in the network. For example, Ethereum would require at least 32 ETH to be staked before someone can become a validator. The rationale behind this is that participants with a financial stake in a network would act in a compliant manner and process blocks truthfully, so as to secure the network or risk losing their stake within the network.

A validator is pseudo-randomly chosen to generate a new block based on its economic stake in the network. Validators will verify (authenticate) blocks by placing a bet on them if they discover a block they think can be added to the chain. This way, all the validators get a reward proportionate to their bets and their stake increases accordingly.

The diagram below provides a graphical illustration of the processes involved in the Proof-of-Stake consensus mechanism.

Source: Capital.com
Source: Capital.com

The Proof-of-Stake consensus mechanism further has numerous varieties or variations such as the Delegated Proof of Stake (DPoS), Leased Proof of Stake (LPoS), Hybrid Proof of Stake (HPoS), Liquid Proof of Stake (LPoS) with each of these variations having its augmented solution to achieve a resource-efficient network governance model.

Having outlined the main processes and concepts behind the two main consensus mechanisms, the subsequent section provides a comparative analysis of both models based on the following criteria:

1. Efficiency/Sustainability

2. Degree of Decentralization

3. Security and Standards

Efficiency and Sustainability Comparison (PoW vs PoS)

It is evident, that the Proof-of-Work consensus mechanism involves the utilization of enormous computing power and energy consumption which has raised numerous debates in relation to its environmental sustainability. Numerous evidence suggests that the exertion of computational resources involved in the Proof-of-Work model is a feature, and not a bug because consensus requires some form of computation (work). This is why many Bitcoin advocates fault the Proof-of-Stake mechanism and likened it to being more of a governance model than a consensus mechanism

Therefore, the solutions towards solving most of the sustainability issues with the Proof-of-Work mining is through the use of renewable energy infrastructures in compliance with SDG-7 in a bid to enhance environmental sustainability as demanded by most governments and in regulations such as the Markets-In-Crypto-Act (MICA) intended to govern the use of digital assets within the European Union (EU).

However, other argument against the Proof-of-Work is that despite the proven fact that the cryptographic puzzles or calculations, involved with the PoW consensus mechanism tend to guarantee the security of the network, these calculations are not able to be utilized beyond that.

On the other hand, Proof of Stake network consensus requires no physical infrastructures, or complex computations and leaves no energy footprint that could be unsustainable to the environment. Even if the validating computer that is staking ETH is destroyed, the staked ETH can be recovered and redeployed using the associated private keys anywhere in the world. This, therefore, amplifies the efficiency and sustainability of the proof-of-stake model. In contrast, all the excessive capital requirements for maintaining the physical PoW network can be directly used to purchase the platform tokens which can then be staked by users in order to participate as network validators, thereby enhancing capital efficiency.

Security Analysis (PoW vs PoS)

The Proof-of-Work has proven to be a highly secure consensus mechanism over time because it makes the underlying network more difficult to hack owing to the fact that the network is constantly monitored by its participants. The network gets tougher per transaction, as the processes involved with solving the associated computational puzzles would require greater computing power. This consequently makes the entire network more secure and more expensive to attack (although the opportunity cost is increased energy consumption). In the Proof-of-Work model, a successful attack would require enormous computational power and time to perform the associated computations. Thereby making it inefficient in most cases, since the incurred cost of perpetrating an attack is typically greater than the potential reward gained in attacking the network.

Similarly, Proof-of-Stake is also secure as all validators engage in verifying transactions. Comparatively, the Proof of Stake (PoS) consensus mechanism is more vulnerable to hacks and security attacks by design. In theory, if a validator (or a group of network validators) gets to a point of owning 51% of staked coins, it implies that the network participant could essentially control the entire blockchain network and alter it, if there is a malicious intent. Thereby compromising the integrity of the network and its transactions. This “hypothetical” scenario is termed as a 51% attack, which might be feasible for smaller blockchain networks.

Degree of Decentralization

Decentralization is one of the most frequently used words in the blockchain space, although in most cases, actual decentralization is easy to define but extremely difficult to implement. As stated earlier, a decentralized system can be characterized by the level of node distribution within the system, preventing any entity from having a majority (>51%) stake in the consensus or governance of the network.

In this case, it is evident that as the Bitcoin network continues to grow, the requirements for participating in the Proof-of-Work consensus continue to increase in terms of expenses and complexities, which leads to the concentration of miners. This is because the control over a PoW chain balls down to the entity that controls ASIC production infrastructures and supply chain components. However, a counter-argument to this is that the Proof-of-Work consensus approach has served as an avenue for energy-rich, but economically poor third-world countries to participate the mining due to the abundance of renewable energy sources needed to power the mining operations. Thereby, leading to further decentralization of nodes within the network.

On the other hand, one of the arguments supporting the case that Proof of Stake leads to an increased level of decentralization is due to the absence of mining facility centralization, economies of scale centralization, and supply chain centralization. This is because the proof-of-stake model strips away any hardware requirements needed to act as a validator, so that general consumer devices are sufficient to verify transactions on the chain without the need for complex computations that lead to energy consumption. Therefore, reducing the economic cost of running a validator node to just the cost of capital (32 ETH). This consequently increases the total feasible number of possible validators within the blockchain network. In essence, minimizing the role of hardware or associated energy cost in network validation maximizes the level of accessibility of the chain and provides the possibility for the largest number of people to verify the chain.

Although the 32 ETH (currently ~$64,000) is still relatively expensive for a lot of retail participants, it is comparatively lower than the infrastructural requirements needed to power a proof-of-work mining operation. In addition, protocols like Lido or Rocketpool allow any amount of ETH to be pooled and delegated to a central repository. Thereby increasing the inclusivity of the consensus process even for users without the base 32 ETH requirements.

In conclusion, since the blockchain technology is a distributed ledger technology that offers immutability, transparency, and security of records, it implies that the mode of achieving consensus on the state of the network is of utmost importance to the overall functioning and state of the network, because there is no central authority for verifying or validating transactions.

As explained in this article, the choice of the consensus mechanism adopted by a blockchain has enormous technical, economic (monetary), social and even regulatory ramifications. That being said, both the proof-of-stake and the proof-of-work consensus mechanism are extremely important to their underlying networks, although efforts must be made in order to improve its efficiency (sustainability), security and level of accessibility to all network participants.

This Article was written by Andrew Sawa a blockchain analyst and crypto content writer. Andrew is a first-class graduate of Information Technology from Middlesex University, and has a Masters (with Distinction) in Information Management.

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