As the blockchain has evolved, various mechanisms for confirming transactions and securing networks have emerged. These are called consensus protocols. The most widely used protocols are Proof-of-Work (PoW) and Proof-of-Stake (PoS). In this article, we will describe the main advantages and disadvantages of these two mechanisms that ensure the stability of blockchain systems.
It is necessary to understand that the blockchain structure is decentralized: it has no central, overriding authority. There’re many participants involved in the blockchain process: thousands of users, computers, and nodes scattered around the world. Having a mechanism that can authenticate and safeguard the network becomes crucial.
A consensus mechanism is a protocol designed to ensure the unity and consistency of data in decentralized networks. This method allows the network participants to reach a consensus on the current state of information.
The primary purpose of the consensus mechanism is to prevent double-spending and ensure the security of transactions. The network reaches a consensus on which transactions are valid and which records will be added to the blockchain.
Let's move on to the two most widely used consensus algorithms, Proof-of-Stake and Proof-of-Work.
The Proof-of-Work (PoW) algorithm is a consensus mechanism used in the Bitcoin network and many other cryptocurrencies to prevent double-spending. This method was introduced by Satoshi Nakamoto in 2008.
In PoW to achieve consensus, miners generate and validate transaction blocks. In their work, they use significant computational resources to ensure the security and correctness of the network. To compete with other miners for the right to confirm the following blocks, they need specialized mining equipment capable of performing complex computational work.
The first miner who manages to find a solution to these complex mathematical problems gets the right to add his block to the blockchain and earn the so-called "block reward". This reward consists of cryptocurrency units created and transaction fees.
In 2024, in the Bitcoin blockchain, the reward per block will be 3.125 BTC. Read our article about Bitcoin halving.
PoW advantages:
Simple and time-tested: Bitcoin, the originator of cryptocurrencies, uses the PoW protocol;
High security: an attack on such a system is improbable.
PoW disadvantages:
Energy intensive: the need for constant computation requires huge amounts of power;
Centralization: large mining farms can control most of the computing power.
The Proof-of-Stake (PoS) mechanism is proposed as an alternative to PoW. Instead of solving complex computational problems, miners in PoS use their cryptocurrencies as a stake to gain the right to create new blocks and validate transactions.
The PoS protocol determines the participant who will validate the subsequent block. The selection process may vary depending on the specific network. For successfully validating a block, the selected participant is rewarded transaction fees from the validated block. The more cryptocurrency blocked into the staking, the higher the probability of being chosen by the validator.
Advantages of PoS:
Energy efficiency: not requiring complex calculations makes the system less energy intensive.
Security: the staking mechanism warns the initiator against forming invalid blocks. If a fraudulent transaction is detected in the network, the validator will suffer a loss in the form of a reduction in its share of the staking and will lose the right to create blocks in the future.
Scalability: since Proof of Stake doesn’t depend on the operation of consensus machines, this mechanism is more scalable. It does not require the purchase of giant mining farms and wasting huge amounts of energy.
PoS Disadvantages:
51% attack: although Proof of Work is also vulnerable to the risks of this attack, blockchains using the Proof of Stake mechanism have a higher vulnerability to such situations.
In the case of a declining token value or low market capitalization of the blockchain, attackers could acquire more than 50% of the tokens at a low price and be able to seize control of the network.
Wealth centralization: those who already have a lot of coins can get even more. In some cases, staking may require large investments.
Energy costs PoW is energy intensive due to complex calculations. PoS is much more energy efficient.
Decentralization PoW faces the risk of centralization due to the possibility of large mining pools forming. PoS is considered a more decentralized method.
Security Both methods provide security to the network. In PoW, security is based on processing power, while in PoS it is based on the staking process.
Startup cost PoW requires the purchase of expensive hardware to participate in PoS. For PoS, having a certain amount of cryptocurrencies is sufficient.
Transaction speed PoS often offers faster transaction confirmations because of the simple verification process.
Proof-of-Work and Proof-of-Stake hold crucial positions in the world of cryptocurrencies. It is difficult to determine which of these consensus protocols performs better. PoW has been criticized due to the high carbon emissions associated with the mining process. At the same time, this method is deservedly defined as reliable for securing blockchain networks. Regardless of the choice, maintaining the security and stability of the network is vital.