Carla Moretti
Carla Moretti
With almost two decades of experience in the fast-paced financial industry, Carla has established herself as a powerhouse and an innovative leader.
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    Proof of Work vs. Proof of Stake: What Is Better?

    Prrof of Work Vs Proof of Stake

    Proof of Work vs. Proof of Stake Winner

    Although Proof of Work and Proof of Stake each have their issues, based on the energy efficiency alone, Proof of Stake beats Proof of Work.

    Furthermore, the technology behind Proof of Work is slower and redundant and does not fit into the future of Web 3.0.

    Simply put, the proof of work algorithm makes users expend power in solving complex mathematical problems to prove their commitment to the network and their reliability. After continuous trial and error, when someone solves the problem, they are allowed to add the next block to the blockchain and are rewarded with the blockchain’s native token for their computational power.

    Conversely, proof of stake does not ask users to expend computing power; instead, they buy the native token of the blockchain and pledge it. Proof of stake uses a weighted algorithm that randomly assigns users the right to add a new block based on their validation experience (the amount of time they have staked their coins for), and the amount that they have staked.

    These are two ways that a blockchain can be maintained. There are other, newer, ones, that are being tested for their veracity, and have even been employed by a blockchain technology or two. But the main focus of our discussion is proof of work and proof of stake because both of these technologies have very different ways of tackling the issue of how the blockchain will be maintained. They not only represent two different methodologies but two different ideologies. 

    Bitcoin was the first popular cryptocurrency. The hashing algorithm that it used to maintain the blockchain was based on a proof of work protocol. Let’s take a detailed look at what proof of work really is, and then see how Bitcoin and other coins implement the technology.

    Proof of Work Protocol

    Mining Cryptocurrency

    The birth of proof of work is older than cryptocurrencies. The idea was first born when the internet was witnessing the initial era of the plague of spam emails and whatnot. The idea was that an algorithm could be designed that would force users to expend a significant, yet feasible amount of computing power to participate in the network. This would deter frivolous uses of computing power.

    The algorithm would usually be a puzzle or a cryptographic equation that only computers could solve. The problem with this idea in the blockchain world was that as the blockchain expanded and the system started to grow, it would take longer times and more computational power to add a new block to the blockchain. Conversely, the benefit was that as the network grew larger, it would become harder to compromise it.

    If someone wanted to make changes to the blockchain with malicious intent, they would have to control 51% of the computational power, which is virtually impossible, especially in the case of Bitcoin, which uses unimaginable amounts of computational power.

    This idea of having a proof-of-work protocol led to the first hashing algorithm, the SHA-256 hashing algorithm. This is the algorithm that powers Bitcoin. Let’s take a deeper look at how this algorithm works.

    SHA-256 Algorithm

    The SHA-256 algorithm comes from a very old family of algorithms. SHA is an acronym for Secure Hash Algorithm. Before we talk about SHA more, a little about what is hashing. Hashing is a technique that takes in an input, passes it through a hashing function, and then gives an output value that is unique to the input and cannot be reverse-engineered to get the input. It is usually used for password storage and file verification.

    The SHA-256 belongs to the SHA 2 family that was published in a paper in 2001. When the SHA 1 algorithm became more and more vulnerable to brute force attacks, the need for the SHA 2 family was born.

    A brute force attack uses raw computing power to make as many attempts as possible, as quickly as possible, for guessing the hash key. The key differentiating factor between the other SHA 2 algorithms and SHA 256 is that regardless of what the input is, the output will always be a 256-bit value.

    There are various ways that the SHA algorithm is used. It is used to verify signatures and password hashing. It is used while we browse the internet, in an SSL handshake that allows the exchange of a hashing key between your computer and a website and forms a secure connection. It is also used to check the integrity and veracity of files using MD5 checksums, which is an important element in peer-to-peer file sharing to ensure that files aren’t changed during transit.

    How is SHA-256 used in the Blockchain to verify transactions?

    The SHA-256 algorithm has most popularly been adopted by Bitcoin. It powers the consensus mechanism, in which the hash value of new blocks is calculated by varying the value of the nonce (single-time use arbitrary number) until the right hash is calculated. Only then is the block accepted into the blockchain. Since a blockchain is a chain of blocks, the hashes of data contained in the previous block are calculated and stored in the new block. Transactions done on the blockchain are encrypted through SHA-256, wherein data is encrypted through the algorithm, and only people with a private key can access the data.

    There’s a list of reasons why the creators of Bitcoin used SHA-256 instead of another algorithm from the SHA-2 family. SHA-256 is collision-resistant, which means that it can generate unique values for each new input. It is also preimage resistant, which means that you cannot reverse engineer the input from the hash, ensuring that Bitcoin miners cannot guess the nonce and put authentic computational power into calculating the hash.

    It is deterministic, which means that for one input, it will always generate the same hash value. It also has a large output, which means that there are 2^256 possible solutions, making it physically impossible to run a brute-force attack against it. Lastly, it is Avalanche resistant, which means that even small changes in the input change the output by enough that miners cannot use the hash of one input to guess the hash of another.

    Popular Blockchains that use Proof of Work

    Popular Cryptocurrencies using Proof of Work

    We’ve already talked about how BTC uses the SHA-256 algorithm, but there are a lot of other popular cryptos that use or used to use, Proof of Work to maintain their blockchain. Although Ethereum has now shifted to the Proof of Stake system, it used to work on a Proof of Work protocol known as EtHash. EtHash is a modified version of the Dagger-Hashimoto protocol. What makes it different from BTC’s SHA-256 is that it is memory-resistant, which means that people cannot make big ASIC farms to mine it and control the supply like is done with BTC.

    With regards to how EtHash works, the first component is the seed, which is calculated by scanning all the headers of the blocks that have been computed. A 16 MB pseudorandom cache is calculated from the seeds, and from the cache, a 1 GB dataset is generated. That dataset is then used to make hashes. 

    There are also other popular blockchains that use Proof of Work, including the likes of Litecoin, Monero, Dogecoin, and Bitcoin Cash. That is enough about Proof of Work for now. Let’s take a look at Proof of Stake, and see how it fundamentally differs from Proof of Work and potentially improves upon the idea of maintaining the blockchain safely while conserving energy.

    Proof of Stake and Consensus mechanisms

    Proof of Stake Representation

    Proof of Stake started the next iteration of blockchain technology. It uses a consensus mechanism to process transactions and add new blocks. The consensus mechanism is used to validate new entries to the blocks in a secure and fraud-resistant way. It fixes the energy wastage and frivolous use of computational power that is inherent to Proof of Work by making users stake their crypto as collateral for a chance to become validators and add new blocks to the blockchains.

    Validators are chosen at random, and the higher the number of coins you’re staking, the higher the chance that you will become a validator and be allowed to add a new block. There are various ways different blockchains use this mechanism. There’s also a minimum staking rule, for example, Ethereum requires users to stake at least 32 ETH to become a validator. 32 ETH is a lot of money, thus becoming a validator for Ethereum has a huge entry barrier. Users overcome this by becoming part of staking pools, where users pool their ETH to get a chance to validate a block, and then share the reward.

    Let’s take a look at some prominent blockchains that use Proof of Stake or its variations to secure their system.

    Popular Blockchains that use Proof of Stake

    Most popular cryptocurrencies using proof of stake

    Ethereum successfully completed its shift to Proof of Stake technology in September 2022. As we mentioned before, you need 32 ETH to become a validator on the Ethereum network. This is called the deposit contract. After filling the contract, a validator needs the tools to successfully become a validator: an execution client, a consensus client, and a validator. Validators are put into the activation queue after meeting these requirements.

    The activation queue is designed to keep a check and balance on the number of validators in the system to ensure that it is not unnecessarily flooded. After passing through the queue, users usually receive previously authenticated blocks, when they then re-authenticate and attest their veracity. 

    In Proof of Work, the timing is decided by the mining difficulty, thus it is easy to calculate it and see how things will work. In Proof of Stake, the timing is divided into slots and epochs. Each slot is 12 seconds long, and each epoch has 32 slots. A new block is proposed by a randomly selected validator. The validator creates the block, and that perpetrates it throughout the network to the other nodes. After the majority has voted on the veracity of the block, it is added to the blockchain.

    There are also checkpoints at the start of each epoch to ensure the safety of a blockchain. A hacker would require at least 1/3rd of the total supply of Ethereum to compromise a checkpoint, which is virtually impossible.

    Proof of Work vs. Proof of Stake

    There are a lot of issues with the Proof of Work that Proof of Stake tried to fix, but in doing so, it spawned problems of its own. Let’s take a look at the issues that both networks face.

    Issues with Proof of Work

     

    Energy inefficiency And Waste of computing power

    The biggest issue with Proof of Work is that it wastes a lot of energy in generating computing power. That computing power could be used for something actually useful instead of solving useless puzzles in an insane race to get to the prize first.

    To give you a clearer picture, let’s take a look at some numbers. It takes 1,449 kWh to complete one Bitcoin transaction. That is enough energy to power an average US household for 50 days. If you calculate the monetary cost of generating electricity in the US, it costs $173.

    Annually, Bitcoin uses almost 131.26 terawatt-hours of energy, which is enough to power the entire country of Argentina. It is not difficult to understand why that would be bad.

    Security issues

    There are many reasons why the security of a Proof of Work system is dubious. The first and foremost issue is that since it requires expensive equipment (and a lot of it) to mine a good amount of BTC, there is a huge barrier to entry. Therefore, the power is consolidated in the hands of the few.

    The system is also unable to harshly punish bad actors since nobody can show up and physically confiscate the machines of miners who are mining with malicious intent. They can block their accounts, sure, but they can come again with different ones and keep mining. Proof of Stake fixes that by simply confiscating the funds that were staked, bad actors would lose all their money if they tried to game the system.

    Transaction finality is also not guaranteed. There is always the chance that once a transaction has been added to the block, a longer chain comes along and reverses the transaction. This leads to attacks on the system before it has fully matured. Even after the system has matured, it has no way to deal with such malicious attacks because the system is inherently flawed.  

    Issues with Proof of Stake

     

    Entry Barriers and Centralization due to consensus mechanism

    The barrier to becoming a validator is huge. Extensive upfront investment is required to become a part of the network, and even more, is required if you want to increase your chance of validating a block. Therefore, power is centralized in the hands of the few, which means that it goes against the ideology of the blockchain by becoming more and more centralized instead of decentralized. There is also the issue of forking and double spending, an issue that even Ethereum faced in its earlier days due to a hack.

    Coin hoarding also becomes a real problem, since more coins staked means more chance to earn more coins. This takes coins out of supply as people hoard them. If an asset has a very low volume in trading, it becomes hard for it to grow or for people to efficiently trade it.

    The Final Verdict

    Although Proof of Work and Proof of Stake each have their issues, based on the energy efficiency alone, Proof of Stake beats Proof of Work. The world needs to shift towards a greener approach to stall the growth of global warming. Furthermore, the technology behind Proof of Work is slower and redundant and does not fit into the future of Web 3.0.

    The consensus mechanisms used in verifying transactions in the proof of stake system are being adopted in various other energy-efficient blockchain technologies and digital assets. Keeping energy consumption low is the norm in new blockchain technologies which are also better at validating transactions faster. The economic incentive is there since it makes the blockchain network more secure as well as reduces energy consumption.

    For example, Solana uses Proof of History, a model that improves upon Proof of Stake. There are many other technologies out there that make proof-of-work blockchains look like Web 1.0. If you have any favorite projects, let us know in the comments below!

    Skrumble.com provides all its content for informational purposes only, and this should not be taken as financial advice to buy, trade or sell cryptocurrency or use any specific exchange. Please do not use this website as investment advice, financial advice or legal advice, and each individual’s needs may vary from that of the author. This post includes affiliate links with our partners who may compensate us. 

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