Proof-of-Work vs. Proof-of-Stake or Why Blockchain is so Secure
Why it is close to impossible to hack a blockchain.
Proof-of-work has the nice property that it can be relayed through untrusted middlemen. We don’t have to worry about a chain of custody of communication. It doesn’t matter who tells you a longest chain, the proof-of-work speaks for itself.
— Satoshi Nakamoto, creator of Bitcoin
You’ve heard about Bitcoin and Blockchain, especially the decentralization it brings to the entire world. You’ve also probably heard about different companies having their blockchain, such as Ethereum, Cardano, Solana, etc.
But have you ever wondered about the models, decisive factors, algorithms, and the underlying technology behind the main functionalities of blockchain that makes them a significant feature of Bitcoin and cryptocurrencies in general?
These algorithms are known as the Consensus mechanism or protocols. The consensus mechanism is a commonly used day-to-day crypto jargon that needs a concise explanation to grasp the meaning and how it works.
When we say there is a Consensus, it simply means that a general agreement has been reached. Just like in a meeting that comprises 20 people, a consensus is reached when 14 out of 20 agree on a particular motion — in other words, the majority carries the vote. But in the case of blockchain technology, obtaining consensus means that at least 51 percent of the nodes agree on the network’s current situation.
What is Consensus Mechanism
Consensus mechanism allows distributed networks of computers to work together and stay theft-proof. It is a mechanism used by blockchain network participants (known as nodes or validator nodes) to agree on what data and information will be stored on the blockchain.
The consensus mechanism is not a new invention. Computers, applications, and servers have also used it. Still, new consensus techniques have been developed in recent years to allow crypto-economic systems like Bitcoin, Ethereum, and others to agree on some defined algorithm.
Consensus mechanisms are a prerequisite for any blockchain system to work properly. They ensure that all nodes are in sync and that the entire network of distributed node operators follows the same set of rules and circumstances. The consensus mechanism also ensures the safety of blockchain users, safety by filtering out incorrect transactions with the help of the validator nodes.
As mentioned earlier, consensus can only be achieved in blockchain when there are agreements between 51% of nodes. However, it is important to understand what is known as the 51% attack.
The 51% attack refers to an attack on crypto-economic systems (like Bitcoin or Solana) carried out by a group of miners that managed to control more than 50% of the network’s computing power. As soon as the attackers have more than 50% of the network’s computing power, they can change the blockchain data in any way they wish.
Consensus mechanisms are designed to make this 51% attack practically impossible by employing multiple practices to solve this security setback via different algorithms that work on various principles. There are more than 30 different consensus mechanisms, the most popular of which are:
- Proof of Work (Bitcoin, Ethereum, Litecoin, Dogecoin)
- Proof of Stake (Ethereum 2.0, Cardano, Algorand, Tezos)
- Delegated Proof of Stake (EOS)
- Proof of History (Solana)
- Proof of Authority (VeChain)
- Proof of Retrievability (Microsoft)
- Proof of Elapsed Time (Hyperledger Sawtooth by The Linux Foundation, IBM, and Intel)
- and many others
Besides the mentioned consensus algorithms, there are some emerging mechanisms such as the Proof of Storage and others. Let’s have a deeper look at the two of the most popular consensus algorithm in blockchain space, Proof of Work and the Proof Of Stake.
What is Proof of Work (PoW)
Proof of Work is the common consensus protocol used by Bitcoin, and some most popular cryptocurrency networks such as Litecoin, Dogecoin and others. It works on the principle of mining to agree on validating transactions.
A simplified analogy to understand Proof of Work is the following:
Imagine a quiz competition comprising 8 students, including you, making 9 students in the hall. Questions are thrown to four of you to solve, and the first to solve it will get a prize.
Luckily, you emerge the winner, and you are given the prize as promised and the solution is recorded on a paper or on the whiteboard for everyone to see. This can be projected to a blockchain technology as follows:
- The paper or the whiteboard where the answer was recorded is the blockchain technology;
- You and your 8 friends in the hall are nodes;
- Those four who participated in the quiz are miners;
- The quiz is a new transaction on Bitcoin or Ethereum or any crypto-economic system that uses proof-of-work;
- The four (miners) who competes to solve the quiz — mining;
- You (the first to solve) records it on paper-blockchain network;
- If 51% of the students agree, you get a reward or a prize- crypto (Bitcoin, Ethereum).
Technically, in Proof of Work, miners compete to solve an exceedingly tough cryptographic puzzle to add the next block (a group of transactions) to the chain. The first person who solves the puzzle wins the prize (Bitcoin). The miner receives a part of newly created Bitcoins as a reward for their efforts.
In Summary, Proof of Work works on the mining principle to reach an agreement on validating transactions. Mining process is expensive since it consumes quite a bit of computing power, which motivates miners to include only the true data to the blockchain that will be accepted by other nodes.
Proof of Stake (PoS)
Unlike PoW, Proof of stake does not involve solving tough computational problems to mine new blocks and coins; rather, it uses staking. Staking is similar to the fixed deposit you do at your local bank, where you save money and earn some interest on it after a while. Staking is the process of locking in coins already owned by members of the network to gain new coins produced with time.
Instead of competing to mine blocks like PoW, a ‘validator’ is only needed to invest his coins in the system for the PoS method.
Your chance of being chosen to construct the next block in a proof-of-stake system is determined by the commitment of the coins you have to use to partake in the system or set aside for staking. For example, a validator with 200 coins has a higher chance of being picked than a validator with 20–50 coins. Cardano, Algorand and Tezos are the examples of blockchain systems with a Proof of Stake consensus algorithms.
There are multiple advantages of the Proof of Stake in comparison to the Proof of Work:
- PoS is a low-energy system, creating new blocks requires less processing resources. Hence, it is environmentally friendly due to the low carbon emission and lesser electricity consumption than PoW.
- On the issue of scalability, PoS is highly scalable with cheap transaction fees compared to PoW. Therefore, Ethereum is trying to address the issue of scalability and high transaction fees by planning to upgrade to ETH 2.0 and also adopt the proof of Stake model.
- And lastly, on the issue of security, 51% attack is less likely to happen with PoS based blockchain system compared to PoW.
Keywords: Blockchain, cryptocurrency, decentralization, Bitcoin, Ethereum, smart contracts, consensus, proof of work, proof of stake.
