Proof of Stake, Proof of Work And The Future of Web3
Proof of Work and Proof of Stake are the two main strategies used in the realm of cryptocurrencies to gain consensus on the ledger's current state. Although each approach has benefits and drawbacks of its own, there has been much discussion on which is best. We will examine the distinctions between evidence of labor and proof of stake in this blog post, as well as the advantages and disadvantages of each, and what that means for Web3's future.
Proof of Work
The Upside
The initial consensus method employed by cryptocurrencies was Proof of Work (PoW), and is primarily used by the Bitcoin Network. In this model, crypto miners compete to find solutions to challenging mathematical puzzles in a proof-of-work system in order to validate transactions and add them to the blockchain. A specific number of cryptocurrency tokens are awarded to the first miner who cracks the problem. This is the “work.”
PoW has a lot of security, which is one of its key benefits. It is improbable that a bad actor could take over the network due to the problems' difficulty. Additionally, the network is decentralized and immune to censorship because numerous miners are working on the same puzzle. When a transaction is validated, it generates a singular hash, which is distributed across the entire chain. Any changes to the hash via tampering, would be noticed, and immediately rejected.
The Downside
PoW does, however, have some disadvantages. It requires a lot of energy; in fact the Bitcoin network alone uses up as much power as the entire country of Malaysia or Sweden. The amount of computing necessary to solve the riddles uses a lot of electricity, which can be costly and harmful to the environment. This inefficiency in energy used vs. output is a key reason why other cryptocurrencies have moved away from this model.
As a result of the fact that the payouts for mining depend on the amount of processing power that a miner contributes to the network, miners also have a propensity to create sizeable mining pools in order to enhance their chances of winning a reward, and investing heavily into their costly tech stacks. This means that the decentralized nature of the network may be compromised by the centralization of resources, and the high barrier to entry.
Proof of Stake
The Upside
On the other hand, Proof of Stake (PoS) is a relatively new consensus method that seeks to alleviate some of the problems with PoW. The likelihood that a miner will be picked to validate a transaction in a PoS system depends on the number of tokens they possess. This implies that a miner is more likely to be selected to validate a transaction the more tokens they own. This offers a potential validator a lower barrier to entry.
The fact that PoS uses less energy than PoW is one of its key benefits, as was demonstrated by the Ethereum merge earlier this year. The switch made the Ethereum network much faster, and cut down energy consumption by nearly 100%. PoW uses a lot less electricity since it spares miners from having to tackle challenging arithmetic and cryptographic problems. This reduces the costs related to mining and makes it more environmentally friendly.
Furthermore, since a PoS system bases mining incentives on the quantity of tokens that a miner has, there is less motivation to create huge mining pools, which can aid in preventing centralization. Finally, if a validator adds an inaccurate block, they lose some of their staked crypto, meaning that there is an incentive for miners and validators to be as accurate and as transparent as possible.
The Downside
PoS, however, is not without flaws. A "nothing at stake" attack, in which a miner can easily validate several copies of the blockchain without any repercussions, is one example of an attack that may be more likely to target it. A large number of token holders are also more likely to obtain benefits because mining payments are based on the quantity of tokens a miner has. As a result, a wealthy oligarchy of token holders who dominate the network may develop.
As well, the move away from PoW also suggests that regulation might not be too far behind. Given the sheer size and popularity of the Ethereum blockchain, and the value of ETH, some have suggested that the SEC may consider Eth a security, rather than a commodity, as the investors may anticipate profit, based on the effort of others. Nothing has come out of this fear as of late, but the possibility of crypto moving into the purview of the SEC and other regulatory bodies, hangs over the PoS model.
Proof of The Future
Overall, both Proof of Work and Proof of Stake each have advantages and disadvantages. Although very safe and decentralized, PoW requires a lot of energy which has led to governments calling for crypto mining standards, and to make this energy-intensive process much greener.
On the other hand, PoS is more energy-efficient and can avoid centralization, but it can also create an oligarchy of affluent token holders and is susceptible to some forms of attacks.
But, the positive benefits do outweigh the negatives. With PoS offering a network that requires less energy consumption, faster transaction speeds, ease of use, and a lower barrier to entry, organizations both in Web3 and Web2 can rely on the blockchain more and more as time goes on. PoS is a more scalable solution which makes it easier to find more mass adoption among newer users.
As it stands, both PoW and PoS exist side by side, both currently in use. Both will continue to thrive, along with other alternatives such as Solana’s Proof of History, to validate transactions. But it’s PoS that will be the mechanism to take Web3 into mass adoption, especially when it comes to critical infrastructure such as financial systems, that rely on speed, efficiency, and security.