Proof-of-Stake (PoS) and Proof-of-Work (PoW) are the two most common types of consensus mechanisms found in cryptocurrency protocols.
Consensus for Blockchains
To understand proof-of-work and proof-of-stake, you must first understand what consensus means and why it’s necessary.
To be trustworthy, blockchains must be completely secured and verified by many people, or machines, instead of a central entity like a bank or government. This is possible with consensus mechanisms which are a core part of any blockchain network. Essentially, consensus makes sure that every new block that is added to the blockchain is the only version of the truth that is agreed upon by all the blockchain nodes. Thus, a consensus algorithm is a process through which all the peers of a blockchain network reach a common agreement about the present state of the distributed ledger.
What is Proof-of-Work?
Proof-of-Work, or PoW, is the original consensus process used by Bitcoin, the first cryptocurrency.
PoW achieves the decentralized consensus needed to add new blocks to a blockchain. It achieves this by using machines to compete against one another by guessing the answer to math problems that have no feasible faster solution. Computational power is a requirement for the PoW protocol’s success. In other words, PoW assumes that those contributing more resources (ie: energy, supercomputers, etc.) to a problem are less likely to want to destroy the protocol. As an incentive to participate in this consensus process, miners are rewarded with tokens.
Disadvantages of Proof-of-Work
There are two major disadvantages of the PoW consensus process.
Disadvantage #1: PoW is Not Eco-Friendly
One of the most significant disadvantages of PoW is that it is computationally intensive, and it is designed to get more computationally intensive by the minute. As a result, it requires a lot of electricity, particularly for large networks like Bitcoin (BTC). In fact, according to a recent BBC report, BTC consumes approximately 121.36 terawatt-hours (TWh) of electricity each year, which is more than the power usage of all but 29 countries worldwide. As the demand for hash power (or computational power in the PoW network) grows, so does the demand for power.
The PoW process is also inefficient, wasting the majority of the energy it requires. Since PoW requires all machines to guess computations for a single equation that can only be won by one machine, all other machines that failed in their attempt wasted valuable energy on that lost equation. Consider how damaging that is to the climate!
In addition to requiring a lot of power, geographic factors like electricity costs and temperature also play a role. PoW hardware produces a lot of heat, so cooling is necessary and in some cases can be very costly. This leads to natural concentrations of mining resources in areas where there are both favorable economic and environmental conditions, i.e. places that are naturally very cold with low electricity costs.
The amount of resources available for consensus to work is greatly reduced by using PoS. Instead, it demands economic capital, such as tokens, which contributes to the network’s success by increasing behavioral economic incentivization. Validators don’t have to spend money on mining equipment or high energy bills while using PoS. They just need some crypto, which they have already staked – or locked in a wallet to earn rewards.
Disadvantage #2: PoW is Expensive and Centralized
The massive computational power required for PoW consensus also leads to its second drawback: centralization. For most people, the high cost of equipment is a barrier to entry.
Oftentimes, even established miners pool their mining power with other miners because of the high costs. This, however, results in a higher concentration of hash rate in one place. In a recent 2020 Decrypt Report, it was found that Chinese Bitcoin miners currently control about 65 percent of the BTC network’s hash rate. Not only does this show signs of centralization, but this concentration is also enough to cause a 51 percent attack, which can break most networks.
If this is true, any network could be subjected to a 51 percent attack, particularly if a large number of miners from a major network like BTC switched over to participate in the attack.
However, with PoS networks, like Mina, 51% attacks are virtually impossible. A centralized attack could only happen by owning more than 51% of the supply of the coins, which would typically require more economic resources than the value of breaking the protocol. In other words, it would be too expensive to break the PoS network this way.
What is Proof-of-Stake?
Proof-of-Stake (PoS) is another form of consensus that is becoming increasingly popular in the crypto industry – used by projects like Cardano, Solana, and many others.
On the contrary to PoW, PoS does not depend on computational resources to achieve a decentralized consensus. Instead, PoS reaches consensus by encouraging members to “stake”, or lock up a minimum amount of crypto directly in the network to participate. Users in the PoS consensus mechanism are known as “validators,” “bakers,” “stakers,” or “block producers,” instead of “miners” from PoW.
Instead of competing to guess computational problems first, validators on Mina’s PoS are chosen at random for block validation, and the likelihood of being chosen is always proportional to the sum of cryptocurrency staked. This means that the more crypto you stake, the more likely you are to be chosen to validate new blocks. The winning validators are compensated with a percentage yield of the crypto they have staked as an incentive for engaging in this process. In other words, if anyone is staking 1 percent of the network’s overall stake, they will be rewarded 1 percent of the total inflation.
Another benefit of staking can be participation in the governance of the platform, meaning stakers have a voice or voting power with regards to any changes made to the protocol.
Mina Protocol uses a proof-of-stake (PoS) consensus mechanism called Ouroboros Samasika, based on Cardano’s PoS Ouroboros. The primary difference between Mina’s PoS versus others’ is that Ouroboros Samasika achieves consensus without long-term history. You can read more about it here.
Another difference compared to other PoS protocols is that Mina’s PoS consensus system does not involve locking up stakes to validate.
Moreover, many PoS protocols impose severe penalties on stakers who perform activities that can jeopardize the network or the legitimacy of the chain – such as attempting to authorize “double-spend” transactions to remain offline, not validating for an extended period of time, or any other network-destructive activity. Most times, penalties include seizing all or most of the staker’s coins. However, in Mina’s protocol, a misbehaving node is just no longer trusted, but funds are not at risk.
PoS is a Greener Alternative to PoW
Essentially, PoW is like PoS in that it still requires contributing resources to the process of block validation. While PoW contributes resources in the form of machines and electricity, PoS contributes resources in the form of a token that can be reused within the ecosystem. However, resource consumption is a poor proxy for a stake in the network. PoS allows for a direct stake in the network, in both the underlying value and security as well as its governance, fully incentivizing the participants to ensure the success of the network. This is what makes PoS a greener alternative to PoW.
Check out a deeper dive into Mina’s consensus mechanism, Ouroboros Samasika.