The drawbacks of proof-of-work or PoW algorithm have prompted the introduction of new consensus mechanisms aimed at promoting energy efficiency and lessening the environmental impact of blockchain technology. Proof-of-stake or PoS emerged as a feasible alternative.
Achieving Blockchain Consensus Through Proof-of-Stake
PoS is a consensus mechanism first introduced in 2012 by two developers who use the pseudonyms Sunny King and Scott Nadal for their peer-to-peer cryptocurrency Peercoin. In designing an alternative cryptocurrency or altcoin, they explained in a technical paper that they took inspiration from Satoshi Nakamoto and Bitcoin.
However, the underlying blockchain they used was not dependent on energy consumption. Hence, in introducing Peercoin, they were also pioneering an alternative to proof-of-work to achieve consensus in their proposed blockchain platform.
Note that a blockchain is generally a type of digital database and a specific type of a distributed digital ledger of transactions. Each block contains all data relevant to a particular transaction, and it is linked or chained together with another block containing all relevant data from a previous transaction. A peer-to-peer network maintains and expands the database.
Blockchains and their specific applications such as crypto-currency and crypto-token production and dissemination depend on achieving consensus among the participants of a peer-to-peer network. Based on cryptography, a consensus mechanism is a system for authenticating transactions without the need for a centralized authority or third party.
PoW is energy-intensive and cost-inefficient. It is also one of the primary reasons for the key drawbacks of blockchain technology and criticisms of cryptocurrencies. A consensus mechanism based on proof-of-stake is an energy-efficient and cost-competitive solution.
PoS vs. PoW: Difference Between Proof-of-Stake and Proof-of-Work
Both PoS and PoW are consensus mechanisms for authenticating transactions without the need for a third party, as well as for preventing tampering with the blockchain. Consensus ensures the security of the blockchain, as well as the authenticity and traceability of each transaction by making it difficult to tamper with any aspect of the ledger of transactions.
In summary, to add a transaction or block to an existing blockchain, the participants of a peer-to-peer network must achieve consensus or, in other words, must agree on things such as the order of transactions and account balances.
The working principle behind PoW is considerably straightforward: to add a block to a blockchain based on a PoW mechanism, one party proves to others that a specific amount of computational effort has been used. The computation must be hard but feasible on the prover side but easy to check for the service provider or other participants.
A prover expends computational resources using powerful computers to solve a mathematical problem. Each participant from a peer-to-peer network can essentially become a prover as long it can solve the mathematical problem faster than the others. The remaining participants are tasked to check whether the provided problem has indeed been solved.
On the other hand, instead of expending computation resources, proof-of-stake achieves consensus by somewhat randomly choosing a single validator from a peer-to-peer network. The process is not entirely random. There is a criterion to become the chosen validator.
Participants in a PoS-based blockchain are enticed to voluntarily give their cryptocurrencies and have them put on hold, thus creating a stake. The higher the stake of a particular participant, the better the chances to be selected as a validator. Because these participants have a stake in the platform, they are compelled to make it as secure as possible.
The cryptocurrencies put on hold can be considered as a security deposit. A chosen participant who authenticates a fraudulent transaction to the blockchain will be penalized. The entire system removes any incentive that comes from gaming the blockchain.
Note that there are more differences between proof-of-work and proof-of-stake. Participants of PoW-based blockchains are called miners, and the process of adding a block to the chain is called mining. In PoS-based blockchains, instead of miners, they have validators, and the process of adding a new block is called minting or forging.
It is also worth mentioning that miners in PoW-based blockchains are rewarded with cryptocurrencies for successfully solving a given mathematical problem. Validators earn a transaction fee associated with a particular PoS-based blockchain transaction.
PoS Pros: The Advantages of Proof-of-Stake Consensus
More Efficient than PoW
Of course, one of the primary advantages of proof-of-stake as a consensus mechanism, especially when compared to proof-of-work mechanism, is that it does not require utilizing powerful computers and consuming large amounts of energy.
Several studies have explored the power consumption of PoW-based blockchains. For example, a 2021 follow-up analysis showed that the energy consumption of Bitcoin mining had increased to 121.36 terawatt-hours per year. The platform consumes more electricity in a year than the whole of Switzerland, Argentina, the Philippines, or The Netherlands.
The huge power requirement of proof-of-work consensus mechanism is the primary reason behind the environmental drawbacks of PoW-based blockchain platforms. The fact remains that power generation remains dependent on fossil fuels.
Cost is also another issue of PoW. Powerful computers are expensive to run and maintain. Heat management or cooling systems needed to prevent these machines from overheating require expending energy resources as well. Hence, mining in PoW-based blockchains can be expensive. The high cost increases the risk for centralized controls due to mining pools.
Bitcoin has demonstrated the tendency for bigger miners or organizations that run pools of miners to gain substantial control over its underlying blockchain platform. PoW consequently gives more work to individuals or organizations with better equipment.
Considering the issues with proof-of-work, the following are the specific advantages of PoS: it is more energy efficient because it does not require expending computational resources, and individuals can participate in the involved peer-to-peer network without the need for purchasing and setting up expensive powerful computers and cooling systems.
Another advantage of proof-of-stake is that it makes the blockchain secure by incentivizing proper validation and disincentivizing improper ones. As mentioned, validators earn a portion of the transaction fee and they will lose stake if they approve fraudulent transactions.
There are also other benefits. For example, when compared to proof-of-work, which is inherently slower when it comes to processing transactions due to the computational requirement, thereby raising scalability issues, a blockchain platform based on proof-of-stake is more scalable because it is more decentralized and allows the participation of more individuals and groups.
Blockchains have multiple applications beyond cryptocurrencies. The Ethereum and Cardano platforms were introduced to host their native crypto-coin and other crypto-tokens, as well as applications such as minting of non-fungible tokens or NFTs, cross-exchanges, decentralized finance, and NFT or blockchain gaming, among others.
PoS Cons: The Disadvantages of Proof-of-Stake Consensus
Of course, the biggest hurdle to participation is that an interested individual needs to own cryptocurrencies native to the particular PoS-based blockchain platform. This can be done either by purchasing cryptocurrencies using fiat money or exchanging crypto-coins and crypto-tokens from other platforms to the compatible native cryptocurrencies.
A PoS-based blockchain is not readily accessible in essence. The technological and technical barriers that come from owning cryptocurrencies and understanding blockchain can deter an individual from participating in the platform.
Then the is this concern about helping the rich get richer. Because it requires to stake cryptocurrencies to participate, and because the higher the stake means the better chances of becoming the chosen validator and earning from doing so, the more cryptocurrencies an individual can afford to buy, the more cryptocurrencies he or she can stake and earn.
It is important to reiterate the fact that the aforesaid concern is no different from proof-of-work. Fundamentally, an individual or organization loaded with cash can purchase more powerful equipment in greater the number, thus increasing their mining success rate.
The 50 Percent Attack
The biggest disadvantage of proof-of-stake is its susceptibility to the so-called 51 percent attack. By definition, this attack is a situation in which a participant or pool of participants can control a blockchain after owning more than 50 percent of authentication capabilities.
Note that both PoW and PoS are susceptible to 51 percent attack. However, in PoS-based blockchain platforms, especially those with younger and lower valued cryptocurrencies, an individual or group can acquire enough cryptocurrencies to gain an advantage against other participants and increase their chance to be chosen as a validator.
A single individual or group that has been frequently chosen to become a validator will eventually collect more transaction fees that in turn, can be used to increase their stake further, thus increasing further their chances to become validators.
But it is important to note that the logic behind proof-of-stake discourages participants from exploiting the PoS-based blockchain platform. It will not be in the best interest of an individual or group to attack a platform in which they hold a considerable amount of stake because it would certainly affect the value of the cryptocurrencies they have held.
Other Issues With PoS
A major criticism of proof-of-stake, particularly when compared to proof-of-work, is that it is still considerably new. As such, its security is not as proven as PoW. The need to expend computational resources in proof-of-work provides a more solid consensus mechanism.
Switching from PoW to PoS can also be difficult. Note that Ethereum has announced its plan to switch to PoS. The transition is currently ongoing. For more established blockchains, such as the Bitcoin blockchain platform, some believe that transitioning to a proof-of-stake mechanism is almost impossible due to technical difficulties.
Another issue some people have with proof-of-stake is that the reward for staking or more specifically, for minting or forging is not as much as the reward from mining. Participants of PoW-based blockchains earn more than those PoS participants.
FURTHER READINGS AND REFERENCES
- Criddle, C. 2021. “Bitcoin Consumes ‘More Electricity than Argentina.” BBC. Available online
- King, S. and Nadal, Scott. 2012. PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake. Available online
- S. 2008. Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin.org. Available via PDF
- Nguyen, C. T., Hoang, D. T., Nguyen, D. N., Niyato, D., Nguyen, H. T., and Dutkiewicz, E. 2019. “Proof-of-Stake Consensus Mechanisms for Future Blockchain Networks: Fundamentals, Applications and Opportunities.” IEEE Access. 7: 85727-85745. DOI: 1109/access.2019.2925010
- Saleh, F. 2020. “Blockchain without Waste: Proof-of-Stake.” The Review of Financial Studies. 34(3): 1156-1190. DOI: 1093/rfs/hhaa075