Proof-of-Work vs. Proof-of-Stake: Why So Many Blockchain Projects Are Utilizing or Making the Switch to PoS?
Bitcoin (BTC) was one of the first cryptocurrencies to truly showcase to the world that cryptocurrencies can have a value associated with them and can function as optimally and even, in some cases, better than traditional FIAT currencies.
As such, when the person or group of people that went by the pseudonym Satoshi Nakamoto wrote the whitepaper and mined the genesis block of the network, we were introduced to the Proof-of-Work (PoW) consensus mechanism for the very first time.
However, while Bitcoin is, to this very day, the number one cryptocurrency in terms of market capitalization, there are still specific limitations associated with it, specifically in the realm of scalability and sustainability.
In fact, the main reason why the Bitcoin cryptocurrency and overall blockchain have been lagging behind other projects is due to its consensus mechanism.
Suppose you are curious about how Proof-of-Work (PoW) works and how Proof-of-Stake (PoW) works as a consensus mechanism today.
In that case, we are going to go over everything you need to know about each consensus system, so you can learn why Ethereum (ETH) is making the switch to PoS and why some of the most successful projects in the crypto sphere are also utilizing the PoS consensus mechanism and not PoW.
Cryptocurrency Mining: How Proof-Of-Work (POW) Defined How We Utilize Cryptocurrencies and Blockchain-Based Payments
Cryptocurrency mining is one of the main ways through which transactions get confirmed when the Proof-of-Work (PoW) consensus mechanism is used on the Bitcoin (BTC)’ blockchain network.
Here, miners or nodes can essentially contribute their computing power toward solving complex cryptographic puzzles. Once these puzzles get solved, the miners get rewarded in the form of the BTC cryptocurrency.
Cryptocurrency mining has been one of the main ways through which transactions get confirmed on the blockchain.
Here, miners or nodes are essentially contributing their computing power, and this has been one of the main reasons why we have seen such an increase in demand for graphics processing units (GPUs).
Through the utilization of the Proof-of-Work (PoW) consensus mechanism, Bitcoin, as well as other blockchains that utilize it, can process transactions through a peer-to-peer (P2P) network in a secure way, without the involvement or dependency on any third parties.
There are two main ways through which miners contribute their processing power in order to mine cryptocurrencies in the PoW consensus mechanism.
The first way is through the usage of an Application-Specific Integrated Circuit (ASIC) miner, which is a computerized device or hardware device that uses ASICs for the sole purpose of mining a digital currency.
However, over the years, most miners switched to GPU mining, which has proven to be a lot more efficient when it comes to mining-specific cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).
As a means of going over how all of this works in the highest level of detail possible, we will be exploring how GPU mining works and what miners actually do with their mining hardware.
GPU Mining Explained: How Miners Actually Work
Graphics Processing Units (GPUs) are essentially expansion cards that can be a part of a computer build that is traditionally intended for the process of rendering images that are showcased on the computer display. High-end GPUs will typically be utilized for gaming and have advanced features that make them stand out, such as ray tracing.
A graphics card is mounted to a motherboard.
However, it has similar features to a motherboard. Specifically, it has a printed circuit board, its own processing unit, its own random access memory (RAM), as well as other components, which makes it one of the most complex parts of any computer built out there.
There are two main types of GPUs out there, and these include integrated GPUs, which are built into the processor’s (CPU) chip, and discrete GPUs, which are separate parts altogether.
Discrete GPUs get mounted onto the motherboard to a dedicated slot. You can even add two or more GPUs through specific bridges, where you can change or remove any card at any point in time and upgrade them as new ones come out.
Now, a large amount of the latest GPUs that come can be seen as mini-computers, which are the driving force of gaming as well as GPU mining.
This is due to the fact that each GPU has the ability to process a large number of calculations, from drawing anything players see on their screens, including realistic 3D graphics, as well as ray tracing reflections in real-time.
Currently, NVIDIA and AMD are the main competitors when it comes to the creation of graphics cards. However, more companies are jumping into the industry as well, such as Intel, which has thus far had a reputation only for the creation of CPUs.
GPU mining will typically require miners to buy the highest-end graphics cards that are available, as they are most commonly utilized in the process of mining.
The Mining Process: An In-Depth Look
When we are taking a look at the mining process as a whole, this is essentially a procedure where we are making physical computing hardware, doing mathematical calculations on a specific blockchain network that uses PoW to confirm the data in each block which then gets recorded on the blockchain.
The miners get rewarded for this procedure in the form of a newly mined cryptocurrency that is native to that specific blockchain network.
The confirmation of each block of data that gets recorded on the blockchain is completed through mining.
What this means is the following:
- If someone confirms a block on the Bitcoin blockchain, they receive the BTC cryptocurrency as a reward.
- If someone confirms a block on the Ethereum blockchain, they receive the Ether (ETH) cryptocurrency as a reward.
That said, there are multiple ways through which miners can start to contribute to the broader network. First, they can mine individually. However, the most common type of mining is a process where miners join a mining pool, where the reward they end up getting is equivalent to the percentage of processing power they contributed within the pool. This is popular due to the fact that it increases the likelihood that the miners can indeed mine the winning block in the network.
Keep in mind, however, that the mining process is specialized and extremely competitive, so the rewards are divided into how much calculation is done.
Mining is a distributed consensus system that is used to confirm the pending transactions by including them on the blockchain network.
Mining also enforces a chronological order in the blockchain. It is essentially responsible for protecting the authenticity and neutrality of the networks.
This is due to the fact that each node or miner has access to the blockchain and has to agree on the state of the system.
Furthermore, each confirmation needs to occur through packing the transactions within blocks, and these fit specific cryptographic rules. All of them need to be verified by the network.
If someone wanted to successfully change a previously generated block on the blockchain in question for their own malicious means potentially, they would be required to gain control of over 51% of all of the computers that run the blockchain network, which is almost impossible to achieve.
This is due to the fact that miners are responsible for the process of verifying the legitimacy of a blockchain’s transactions.
They get paid for the process of solving the cryptographic puzzles that verify this authenticity through utilizing their ASIC or GPU-based miners. The rewards are used as a means of incentivizing the miners to carry on their work and remain fair through verifying each of the transactions individually. This leads to the prevention of an issue known as “double spending”.
The Double Spending issue Explained
Before we carry on, we need to take a look at the double-spending issue first.
In order for a digital cash system to work and exist, it needs to establish a network that features accounts, balances, and transactions.
The creation of this network and its overall maintenance can be, however, difficult. This is due to the fact that it needs to prevent double-spending.
Double spending is the process of preventing one person from spending the same amount of money twice.
In a traditional financial system, such as a bank, this is something that is managed as well as processed by a centralized server that is responsible for the process of keeping a record of everyone’s balances.
Now, within a decentralized network, this server does not exist. Every single entity that makes up the network can be responsible for this task instead, in the form of a miner.
This means that within this network, there have to be parties that are responsible for the maintenance of the network and that have a full list of all of the transactions so that they can be checked and approved to be valid to prevent double-spending.
If the peers in this network disagree about a specific balance, everything might break, and this is where Proof-of-Work (PoW) as a mining mechanism is through to the picture.
Here’s how PoW works on a fundamental level.
Miners within the network have the ability to confirm the transactions. They take the transactions, confirm that they are legitimate through the process of solving complex cryptographic puzzles, and spread them across the network.
Now, the main role of a miner is to verify the authenticity of each transaction. After a miner confirms the transaction is legitimate, every node then has to add it to their database.
Whenever a new block gets added to the blockchain, it gets added to a previous block and is followed by another block. That transaction then gets bundled with the other transactions in the block and forms a chain next to the block that was mined before it. This is why it is called a blockchain.
Diving Deeper into the Mining Process
Now that we have gone over just about everything that you need to know about ASICs and GPUs that can contribute to the broader mining process, let’s take an in-depth look at how all of it gets tied together.
Miners essentially need to verify the legitimacy of the blockchain transactions. They get paid for the process of solving cryptographic puzzles by utilizing GPU hardware. The rewards then get used to incentivize the miners to carry out their work and remain fair.
Through the process of verifying each transaction, the miners can essentially prevent double-spending. This is due to the fact that once miners verify the block of data as a transaction, the block gets formed and added to the blockchain.
Once it is fully confirmed to be legitimate, they receive a reward.
The block has a size limit that was set by the creator of Bitcoin, Satoshi Nakamoto. However, this limit is different throughout different blockchain networks that utilize it as a consensus mechanism.
Mining relates to the process of analyzing and verifying the hashing blocks and validating the transactions on the blockchain. However, alongside all of that, mining can also be used as a method to disperse new digital currencies onto the network, where miners can get compensated for any transaction fees which occur as well as the bonus for the created coins throughout the process.
This allows for the distribution of new coins to the entire decentralized network, and this, in turn, leads to the motivation of miners to provide security and run their mining computers. The more people that end up joining the network, the more its security gets increased.
The SHA-256 Hash Function
The complex algorithm that each of these mining machines is competing against one another to solve is the SHA-256 hash function.
The computer essentially takes the algorithm and turns it into an output, and this output is the 256-bit number.
Hash functions will typically have this power due to the fact that they are only one-way functions, which means that it is possible for anyone to use the hash function and produce an output when they are given an input.
It is impossible to use the output of the hash to reconstruct the input, however. This is a powerful feature due to the fact that it is used for mining, as well as for the creation of addresses.
The mining process is a way through which new cryptocurrencies can get created into an existing circulation.
Each block that gets added to the broader chain features numerous things, including the version, the previous block hash, the markle root, the timestamp, the target, and the nonce.
When we take a look at the creation process of Bitcoin addresses, in order for someone to produce a Bitcoin address, a private key, which is selected by a random number, is multiplied by the utilization of an elliptic curve, which produces a public key. This key then gets put through the SHA-256 and the REPEMD160 hashing algorithms.
Here we can see that a public key can be 256 bits long, while an address can be 160 bits long.
Keep in mind, however, that there are other mining algorithms as well which can be utilized.
Thus far, we have taken a look at the Bitcoin (BTC) blockchain. However, when we put our perspective on the Litecoin (LTC) network, for example, it utilizes the Scrypt algorithm instead. This is a less power-demanding alternative to the aforementioned model.
Specifically, Scrypt as an algorithm can be solved a lot more quickly, and the hash rate is measured in kilohashes (KH/S). Here, it runs on a password-based key function which was created for the Tarsnap online backup service.
What this means is that it creates pseudorandom numbers that are stored in RAM locations, which in turn makes it almost impossible for hardware attacks to be performed.
Additionally, there is also the X11 algorithm.
This is one of the most efficient algorithms when it comes to GPU mining, where the GPU can run on 30% less wattage in order to actually mine it. This, however, is measured in megahashes (MH/s), and this is an algorithm implemented in the Dash (DASH) network.
Mining Rewards: An In-Depth Look
So far, we have only discussed how miners get rewarded in the form of a new cryptocurrency each time they successfully manage to mine a block. However, things go a lot deeper than this.
Miners get compensated for any transaction fees that occur as well as the bonus for the created coins through the process of validating each of the new hashed blocks that are added to the chain.
This essentially allows for the distribution of new coins that occurs through a decentralized network. The more users that join the network, however, results in the rate at which the block generation occurs increases.
The mining network’s difficulty is measured by how difficult it is to solve the cryptographic puzzles in order to generate a new block. This then gets re-adjusted after several blocks have been mined, and this depends on the blockchain network.
To get this point across, here, we will be taking a look at Bitcoin halving.
Bitcoin’s block reward halving is a process that occurs approximately every 210,000 blocks. It is after that number of blocks that the reward gets cut in half.
We will be taking an in-depth look now at how all of this played out on the Bitcoin network. Remember that not every network features halving.
In 2009, when the genesis block was mined by Satoshi Nakamoto, the reward was 50 BTC.
Then on November 28, 2012, we saw the first Bitcoin halving at a block height of 210,000, where the reward got split to 25 BTC.
Then on July 9, 2016, we saw the third halving, where the block reward was once again cut in half at block height 420,00, where each miner received 12.6 BTC instead.
Then on May 11, 2020, the reward was cut once again at the block height of 630,000, when the reward got cut to 6.25 BTC.
The next halving is expected to occur at block height 840,00, which is set to occur on March 2, 2024, based on estimates, where the reward will be cut to 3.125 BTC.
Now that we have gone over just about everything you need to know surrounding the Proof-of-Work (PoW) consensus mechanism, we can make our way towards Proof-of-Stake (PoS) to truly see why everyone is either making the switch to it or using it by default.
Proof-of-Stake (PoS) Explained
Proof-of-Stake (PoS) was developed to be a direct alternative. This is a consensus mechanism that gets used as a means of validating cryptocurrency transactions as well; however, instead of relying on expensive computing hardware and a high amount of electricity, it does things a bit differently.
In other words, owners of the cryptocurrencies that are a part of the blockchain network that is based on PoS can essentially stake them, after which they have the ability to check the new blocks. They can check the transactions and add them to the blockchain.
Cryptocurrency staking is a process where the owner of a cryptocurrency is required to have a pre-specified amount of tokens within their wallets, and then they need to pledge them to get used by the network for the process of verifying the transactions. These tokens can get locked. However, some networks do not require locking.
Why Staking Is Important and How Staking Works
When we take a look at cryptocurrency staking, there are a few things that you need to keep in mind.
Whenever a validator proposes a block that has inaccurate information, they will typically lose a percentage of the tokens they have previously stated in the form of a penalty. The validator can also check the block, add it, and receive more of the native cryptocurrency token as a reward if they do things the proper way.
The mining power in the Proof-of-Stake (PoS) mechanism is dependent directly on the number of coins that are staked by the validator.
In other words, the participants that end up taking more coins have a higher likelihood of being picked as a validator and adding new blocks to the network. However, this is not the case for every single network out there.
When a cryptocurrency investor makes the decision to stake their holdings, the network can then use those holdings as a means of creating new blocks within the blockchain network. What this means is that the more tokens get staked, the better the odds become that the tokens which have been staked by a specific investor are selected.
The information then gets written in a new block, and the cryptocurrency tokens that are locked and staked are used to validate it.
Due to the fact that the coins already have some data from the blockchain, they can be used as a validator, and the rewards are gained through this means.
Staking Periods: An In-Depth Look
There are specific blockchain networks out there that might require users to lock their cryptocurrency balance throughout a specific time frame. They cannot withdraw the cryptocurrencies throughout the validation process.
There is the Polygon (MATIC) network, for example, which can take about 2 hours when using PoS, or seven days when using Plasma for the asset to appear as staked. The network has an unbounding period of 9 days. Keep in mind that the length of time this takes is dependent on the token; the platform was chosen to facilitate the staking process and the network congestion.
It can take a few days for users to regain access to their cryptocurrencies.
That said, there are numerous projects that utilize the Proof-of-Stake (PoS) consensus mechanism.
A majority of modern projects that are developed will typically opt in towards utilizing the Proof-of-Stake (PoS) consensus model due to the fact that it is a lot eco-friendlier, which means that it is safer for the environment when it comes to validating transactions.
However, we cannot also ignore the fact that there are also some risks involved with staking cryptocurrencies.
Drops in price can occur due to the volatility of cryptocurrencies, and these can potentially outweigh the rewards earned over the time the cryptocurrencies were staked or locked.
Furthermore, there are specific projects out there that might feature a minimum lock-up period, where they cannot be withdrawn. If you decide to withdraw them from a staking pool, there is a pre-specified waiting time as well before you get your cryptocurrencies delivered to your cryptocurrency wallet.
Why Proof-of-Stake (PoS) Is the Go-To Option for a Lot of Projects
By this point in time, it is clear that a majority of blockchain projects are opting in towards the usage and utilization of the Proof-of-Stake (PoS) consensus mechanism as a means of securing the network.
Here, we are going to go over just why this might be the case in the majority of cases.
PoS utilizes a pseudo-randomized election process where it essentially selects the validators from a group of nodes.
The system can then utilize a combination of factors, such as the staking age, randomization, and the wealth of the node, or in other words, how many cryptocurrencies it has staked.
Now, within this system, the blocks get forged rather than get mined, as we saw in Proof-of-Work (PoW). A majority of PoS-based networks will typically launch with a supply of pre-forged cryptocurrencies, which will, in turn, allow nodes to immediately begin the process.
Each user that ends up participating in this process is required to lock up a specific amount of the coins into the network as their stake.
The stake’s size determines the changes of that specific node becoming selected to be the next validator.
However, within a randomized block selection method that might be used in some specific networks, the validators get selected by looking for nodes with a combination of either the lowest hash value or the highest stake. Now, since the sizes of the stakes are public, the next forger will typically be predicted by the other nodes.
Then we need to look at the coin age selection methodology of picking validators. This method is based on how long their tokens have been staked. Specifically, coin age gets calculated through the process of multiplying the number of days the coins have been staked with the number of coins actually staked.
Whenever a node has managed to forge a block, the coin age is then reset to zero, and they then have to wait for a specific time frame prior to being able to forge another block. The main result of this is the fact that the system can prevent large stake nodes from essentially having a high level of dominance throughout the broader network.
The Main Advantages of Proof-of-Stake (PoS) when Compared to Proof-of-Work (PoW)
Now that we have a clear view and perspective of how it works, we can go over the main advantages.
First of all, there is the case of adaptability. Specifically, as the requirements of each user change, and as the blockchain itself evolves, so can the PoS consensus mechanism. This is due to the fact that it is adaptable and can fill specific requirements which might shift over time.
Then there’s the case for decentralization. Specifically, due to the fact that users do not need to buy ASICs or GPUs, as with the case of PoW, there is a much higher level of accessibility. PoS is a lot more affordable to get into, and this, combined with the randomization process, ultimately leads to the network becoming a lot more decentralized.
Keep in mind, however, that staking pools do still exist. However, there is still a much higher chance for an individual person to forge a block under PoS when compared to the changes in PoW networks.
Now we need to look at by far one of the most important reasons why PoS is the future, and this has to do with energy efficiency. As we previously mentioned, PoS is a lot more eco-friendly when compared to PoW.
The cost of participation is directly reliant on the economic cost associated with staking the coins in question rather than the raw hardware and energy consumption involved with solving complex cryptographic puzzles found in hashing algorithms. What this means is that PoS ultimately leads to a lot less energy required to run its consensus mechanism.
This has the additional benefit of scalability. Proof-of-Stake (PoS) is not reliant on physical machines, such as ASICs or GPUs, to mine and reach consensus. This leads to a much higher level of scalability; anyone anywhere in the world can stake cryptocurrencies, which leads to more validators on the network and a higher level of decentralization.
Furthermore, we also need to take a look at how all of this translates to scalability. Staking works as a financial incentive for validators to not process any transactions which might be fraudulent. This is due to the fact that if at any point in time, the network ends up detecting that a fraudulent transaction has indeed occurred, the validator runs the risk of losing a part of their stake and their right to participate in this procedure in the future.
As long as the stake is higher than the reward, the evaluator would end up losing a lot more cryptocurrencies than they would gain with the fraudulent activity that they would engage in, which demotivates bad actors.
Similar to PoW, for someone to be able to own a majority stake in the network, they would have to conduct the 51% attack. However, in PoS, it can be almost impossible to gain control of the network, as someone would have to own 51% of the total circulating supply.
That said, we also need to discuss some of the drawbacks with Proof-of-Stake. Specifically, for users to actually start engaging in the PoS mechanism, they would need to buy the blockchain’s native cryptocurrency tokens. This means that they are required to purchase the token through an exchange or through other means. Depending on the amount which is required by the network to begin staking, this can be a significant investment up front if the staker wants to start staking efficiently.
However, in PoW, there is also an expensive barrier of entry, as both the computer parts and the electricity can be costly, which is something that we need to remember.
These are just some of the main reasons why Proof-of-Stake (PoS) has been the go-to option for a lot of new projects when compared to Proof-of-Work (PoW).
Ethereum (ETH) is a blockchain network that was initially developed on PoW; however, by the end of 2022 aims to switch to PoS with its highly-anticipated network upgrade known as ETH 2.0.
Most new projects that get launched either on their native blockchain or as a layer-2 solution on a pre-existing blockchain will also typically utilize PoS due to all of the aforementioned benefits.