Proof OF Work vs Proof Of Stake: It's Differences

Every blockchain uses a consensus mechanism to validate transactions on its network. This helps these networks run as automated systems on a global scale without any single governing authority. 

Most blockchains generally use two consensus mechanisms: Differences between Proof OF Work and Proof Of Stake. Here’s a comparative analysis of the two.

Proof OF Work vs Proof Of Stake: Mechanism

Bitcoin first used the Proof-of-Work consensus mechanism. It is a mechanism in which miners act as validators of transactions on the network. Miners compete with each other to validate a block by solving complex cryptographic puzzles. They use high-powered ASIC computer systems to find the exact hash to mine the block. Once a miner is successful, one can update the block with the latest verified transactions and win block rewards. 

In the case of the Proof-of-Stake consensus mechanism, you can validate transactions on a block based on the number of coins you stake. The staked coins act as collateral for a chance to validate the blocks. The blockchain algorithm randomly chooses a validator to mine or validate the block. The higher the stake, the greater the chance to win validation rights for a block. 

Different Proof-of-Stake mechanisms use their unique methods for validating blocks. In future, Ethereum will transition to the Proof-of-Stake mechanism. You will need to stake at least 32 ETH to become a validator. Then you must verify transactions and add them to a shard block. 

After that, at least 128 validators must attest to the validity of that transaction. Next, this shard is validated, and the block generates. At least 2/3 of the validators must agree on the validity of that transaction. After that, the block is closed. 

Compared to the validation competition of the Proof-of-Work mechanism, Proof-of-Stake is a validation-sharing process. In the former mechanism, miners compete to solve mathematical problems to mine the blocks. While in the latter, block creators are called validators. They verify activities, check transactions, maintain records and vote on outcomes. 

Proof OF Work vs Proof Of Stake: Rewards

In a Proof-of-Work mechanism, miners who successfully validate the block get block rewards and other fees for their hard work. The block rewards and the fees vary from one blockchain to another. 

Let's take the example of Bitcoin for a better understanding. Suppose you are a miner on the Bitcoin network. You compete with other miners to validate a block, and upon completion, you receive the set block rewards. As Bitcoin’s total supply is finite, its mining rewards will reduce as time passes.

Also, mining difficulty will vary based on the competition on the network. If competition is high among miners, the blockchain will raise its mining difficulty to maintain a set time in which a block gets mined. On the other hand, if competition is less, Bitcoin will lower its mining difficulty to maintain the same. 

In the case of the Proof-of-Stake mechanism, the reward system is different. Based on the percentage of cryptocurrency you stake, you will get an incentive for validating the block. Ethereum 2.0's reward model for block proposers and attesters is different. Block proposer gets 1/8 of the base reward known as ‘B’. 

On the other hand, an attester receives 7/8 of the block reward known as '7/8 B'. It is adjusted on the block proposer's time to submit the attestation. To gain the full ‘7/8 B’ reward, the block attester must submit it as quickly as possible. With each passing time slot, the attester incentive reduces by ‘7/16 B’, ‘7/32 B’ and so on.   

Proof OF Work vs Proof Of Stake: Security

By nature, blockchains are very secure due to their decentralised nature and heavy data encryption. The Proof-of-Work mechanism makes it difficult for any single miner or mining pool to monopolise the blockchain’s computing power. This is because it is difficult to alter any aspect of the blockchain as it will need the alteration of all subsequent blocks. 

Let’s take Bitcoin as an example. Each block can contain 754 transactions and a little over 1,666 Bitcoins. If any hacker tries to change even a small percentage of the transaction amount, the resultant hash will be unrecognisable. Bitcoin will immediately reject it as a fraud attempt. 

Moreover, as the mining process is too resource-intensive, there is very little chance of anyone trying to overtake the network. Miners also face a penalty for submitting invalid information or blocks.   

However, there is a major drawback to this system. In the case of smaller blockchains and newer altcoins, there is a high chance of a 51% attack. It is a situation in which a miner or a group of miners control over 50% of a network’s computing power. This gives them the power to double-spend coins, pause payments between users, prevent confirmation of new transactions and even reverse completed transactions.   

In the case of Proof-of-Stake, the currency that you stake for getting a chance to validate a block acts as a primary security measure. The entire staked amount is lost if a miner attempts a 51% attack and reverts a block. Moreover, it is very difficult for an individual miner or mining pool to have control over 50% currency on that blockchain. This mechanism also penalises miners by slashing some of their staked funds for accepting bad blocks. 

So, the staked crypto assets make validators work in good faith on the network. 

Proof OF Work vs Proof Of Stake: Operational Costs

If you are investing in a blockchain with either Proof-of-Work or Proof-of-Stake mechanism, you also need to know their operational costs. PoW needs high initial investment in the form of hardware. PoS needs a lot of investment as you need many coins to stake on the network. 

However, you can spend less on electricity bills in the case of PoS-based blockchains as compared to PoW-based ones. 

The type of blockchain you invest in depends on your investment strategy and goals. Both have advantages and disadvantages, so you must choose accordingly.