Proof of Work vs Proof of Stake: Understanding the Consensus Mechanisms in Blockchain Technology

To ensure transaction validity, the security of blockchain relies on consensus mechanisms as discussed in my article at https://vulehuan.com/en/blog/2023/03/exploring-blockchain-security-the-role-of-cryptography-and-consensus-algorithms-in-preventing-hacking-and-fraud-30.html. The two most widely used mechanisms are Proof of Work (PoW) and Proof of Stake (PoS). This blog post will examine the strengths and weaknesses of each mechanism and explain why Ethereum 2.0 selected PoS.

Proof of Work

The Proof of Work (PoW) consensus mechanism was first introduced by Bitcoin and has been adopted by several other cryptocurrencies. PoW operates by compelling network participants, also referred to as miners, to solve intricate mathematical problems for validating transactions and appending new blocks to the blockchain. The miner who first solves the problem earns rewards in the form of newly generated coins and transaction fees.

Just as miners need to solve complex mathematical problems to validate transactions in PoW, in the real life, gold miners must extract gold from ores. This process involves facing technical difficulties such as mining through hard rocks, refining the metal, and obtaining pure gold. The miner who successfully extracts the gold is then compensated monetarily based on the amount of gold obtained.

Advantages of PoW

These are some of the advantages of PoW:

• High security: PoW is considered the most secure consensus mechanism in use today because of its robustness and resilience against attacks due to the high computational power required to solve mathematical problems.
• Decentralization: PoW encourages many participants to become miners, resulting in a decentralized network less prone to control or manipulation by a single entity.
• Fairness: PoW provides an opportunity for many participants to join the network and become miners by offering a fair chance for all to validate transactions and earn rewards. The more computing power a miner has, the greater their likelihood of solving the mathematical problem and adding a block to the blockchain. 
• Proven track record: PoW has been extensively used by various cryptocurrencies and has been time-tested, making it a dependable and trustworthy approach to securing the blockchain.
• Sybil attack resistance: PoW is resistant to Sybil attacks, where a single entity creates several fake identities to take over the network, as each identity requires significant computational power to validate transactions and add blocks.

Disadvantages of PoW

• PoW also has some disadvantages to consider. Just to clarify, I mentioned Bitcoin earlier in this blog article, but it is important to note that Bitcoin is just one example of many cryptocurrencies that use PoW consensus mechanisms.
• High energy consumption: PoW requires a large amount of computational power, resulting in high energy consumption and environmental concerns. A report by CoinShares estimates that the average electricity cost for Bitcoin mining is $0.05 per kilowatt-hour https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-carbon-footprint-electricity.html
• Centralization of mining: As mining difficulty increases, small-scale miners find it challenging to compete with large mining pools, leading to the centralization of mining power.
• Vulnerability to 51% attacks: A 51% attack can occur when a single entity or group controls over 50% of the network's computing power, allowing them to manipulate transactions. According to a report by Cointelegraph, Bitcoin Gold experienced a 51% attack in May 2018, resulting in an overspending of around $18 million worth of BTG. The incident led to the coin's removal from Bittrex's listing.
• Slow transaction processing: PoW's high computational requirements can lead to slow transaction processing times, particularly during peak network congestion.
  
• Inefficient resource utilization: PoW's energy-intensive nature results in inefficient use of resources, which is a cause for concern. According to a study by Cambridge University, Bitcoin's annual energy consumption is estimated to be more than the entire country of Argentina https://www.bbc.com/news/technology-56012952
• The environmental impact of PoW has also been a concern. The energy consumption required for Bitcoin mining contributes to greenhouse gas emissions and climate change. In addition, the increasing demand for energy to power PoW-based cryptocurrencies may also lead to a strain on non-renewable energy sources https://www.jbs.cam.ac.uk/insight/2022/a-deep-dive-into-bitcoins-environmental-impact/

Proof of Stake

PoS is a consensus mechanism created to tackle some of the limitations of PoW. PoS operates by mandating network participants, known as validators, to maintain a specific quantity of cryptocurrency in a "staking" wallet. Validators are selected to validate transactions and add fresh blocks to the blockchain based on the number of cryptocurrencies they hold.

Here are some examples in real life that are similar to the way PoS works:

• Voting in shareholder meetings - In a company's shareholder meeting, voting power is typically proportional to the number of shares held. Shareholders with more shares have more "stake" in the company and therefore more influence over the company's decisions.
• Deposits for rental agreements - When renting a property, a landlord may require a security deposit from the tenant as collateral in case of damage or unpaid rent. The size of the deposit is often proportional to the monthly rent, similar to how a validator's stake in a PoS network is proportional to the amount of cryptocurrency they hold.
• Reputation in online marketplaces - In online marketplaces such as eBay or Amazon, the reputation of the seller is often based on their history of sales and reviews. This acts as collateral to ensure that the seller is trustworthy and delivers quality products.
• Reputation in social media platforms - In social media platforms such as Twitter or Instagram, the reputation of the user is often based on their history of posts and engagement. This acts as a form of collateral to ensure that the user is trustworthy and adds value to the platform.

Here are some examples of popular cryptocurrencies and blockchain platforms that use PoS, although there are many others:

• Ethereum (ETH): The second-largest cryptocurrency by market capitalization, Ethereum 2.0 is currently transitioning from PoW to PoS.
• Cardano (ADA): A decentralized blockchain platform that uses PoS and was designed to be a more secure and sustainable alternative to PoW.
• Polkadot (DOT): A multi-chain blockchain platform that uses PoS and enables interoperability between different blockchain networks.
• Binance Coin (BNB): A cryptocurrency created by the Binance exchange, BNB uses PoS for various functions on the Binance platform.
• Cosmos (ATOM): A decentralized network of independent blockchains that uses PoS and allows for interoperability between different blockchains.
• Tezos (XTZ): A blockchain platform that uses PoS and aims to provide a more secure and efficient alternative to PoW.
• Avalanche (AVAX): A decentralized platform for building dApps that uses PoS and can process thousands of transactions per second.

Advantages of PoS

Here are some advantages of the Proof of Stake (PoS) consensus mechanism:

• Energy efficiency: PoS requires significantly less energy than PoW, making it more environmentally friendly and cost-effective. According to Digiconomist's Bitcoin Energy Consumption Index, the annual energy consumption of the Bitcoin network using PoW is around 129.09 TWh (terawatt-hours) as of March 2023. In contrast, the energy consumption of the Cardano network using PoS is estimated to be around 0.6 TWh per year, which is significantly less than the energy consumption of the Bitcoin network. Similarly, the Ethereum network is in the process of transitioning from PoW to PoS, which is expected to significantly reduce its energy consumption. These statistics indicate that PoS is much more energy-efficient than PoW.
  
• Reduced centralization: PoS reduces the risk of centralization since validators are chosen based on the amount of cryptocurrency they hold, rather than computing power.
• Increased network participation: PoS incentivizes more users to participate in the network since they can earn rewards by holding and staking cryptocurrency.
• Stability: PoS reduces the risk of forks in the blockchain since the consensus mechanism is based on the stakeholder's agreement, and there is no need for miners to compete for rewards.
• Governance: PoS allows for decentralized governance since validators have a say in the decision-making process based on the amount of cryptocurrency they hold and stake.
• Scalability: PoS allows for greater scalability than PoW since it can process more transactions per second. According to blocktivity.info, a website that tracks blockchain activity, EOS consistently ranks among the top blockchains in terms of transaction volume and processing speed, often handling more transactions per second than Bitcoin and Ethereum, which both use PoW consensus.

Disadvantages of PoS

Here are some disadvantages of PoS:

• Centralization risk: Since validators are chosen based on the amount of cryptocurrency they hold, there is a risk that larger validators will become more dominant in the network, leading to centralization. PoS requires validators to maintain a certain amount of cryptocurrency in a staking wallet. This can lead to centralization as only those with enough funds can participate in the validation process, potentially excluding more minor participants.
• Initial distribution: The initial distribution of cryptocurrency can significantly impact the security and decentralization of a PoS network. If a small number of people hold a large percentage of the total supply, it can make the network more vulnerable to attacks.
• Nothing at stake problem: The "nothing at stake" problem refers to the potential for validators in a PoS system to validate multiple conflicting versions of the blockchain. This can occur because validators do not need to expend significant computational resources to validate transactions and create new blocks, unlike in PoW systems where miners must perform complex calculations. This can make it difficult to reach a consensus and can lead to the network becoming less secure. 
  • Imagine a political election where voters can vote for multiple candidates, and the winner is the one who gets the most votes. However, there is no penalty for voting for more than one candidate, and voters are incentivized to vote for all of them. In this scenario, the voting system is vulnerable to the "nothing at stake" problem since voters have nothing to lose by voting for all candidates.
    
  • If a validator in a PoS system is presented with two different versions of the blockchain, each with different transaction histories. Under normal circumstances, the validator would only validate the version of the blockchain with the most work (longest chain) done on it, as this would indicate that the most computational resources have been expended to create it. However, in a PoS system, validators could validate both versions of the blockchain, since doing so does not require any additional computational resources. This results in a situation where the blockchain is split into multiple branches, each with different transaction histories.
• Difficulty in upgrading: Unlike PoW, which can be upgraded by changing the mining algorithm, upgrading a PoS network can be more difficult. This is because changing the consensus mechanism requires a hard fork, which can be contentious and lead to a split in the community.

Long-range attacks

Both PoW and PoS can be vulnerable to long-range attacks, but PoS may be more susceptible to such attacks. In a long-range attack, an attacker may attempt to modify the blockchain's history by reconstructing it from an earlier point in time, then creating a longer alternative chain.

In PoW, this type of attack would require a significant amount of computational power to successfully outpace the existing chain and create a longer one. In contrast, in PoS, an attacker with a large amount of stake could potentially reconstruct the chain from a much earlier point in time, then create a longer chain and thus gain control of the network.

Some examples of long-range attacks that may occur in a blockchain network are:

• Replay attacks: A replay attack is when an attacker intercepts legitimate transactions on a blockchain and retransmits them on a different network, causing the recipient to receive the same cryptocurrency twice. This attack can occur during a hard fork when two chains with identical transaction histories are created, allowing an attacker to double-spend coins on both chains. To prevent replay attacks, developers can use techniques such as adding unique transaction identifiers or using replay protection protocols. For instance, if Alice sends one bitcoin to Bob on a blockchain, an attacker can intercept the transaction and replay it on another blockchain. If Bob accepts the transaction on the second blockchain, he would receive one bitcoin from both Alice and the attacker, and the attacker could withdraw the original bitcoin from the first blockchain before the network recognizes the double-spend.
• History revision attacks: An attacker can create a new chain that forks from an earlier point in the blockchain's history and work to create a longer chain than the original, effectively re-writing the history of the blockchain.
• Timejacking attacks: An attacker can manipulate the timestamps of transactions to create a fork in the blockchain's history.
• Checkpoint attacks: A centralized authority may create checkpoints in the blockchain's history to prevent long-range attacks. However, an attacker can still attempt to rewrite the blockchain history before the first checkpoint.

Long-range attacks on a blockchain can be prevented using different methods. One approach is using checkpoints where a central authority creates checkpoints in the blockchain's history to hinder these types of attacks, although this introduces centralization which contradicts the decentralized nature of the blockchain. Finality gadgets can also be used to ensure the validity and finality of blocks, making it harder for attackers to rewrite the blockchain's history. Additionally, Delegated Proof of Stake (DPoS) protocols allow coin holders to delegate their voting power to trusted validators to create new blocks, decreasing the likelihood of long-range attacks. Cryptographic techniques such as adding unique transaction identifiers or using replay protection protocols can also be used to prevent attackers from replaying transactions on different blockchains or networks. Each method has its advantages and disadvantages, and developers must weigh the trade-offs to determine which method is most suitable for their specific blockchain protocol.

Why Ethereum 2.0 chose PoS?

Ethereum, the second-largest cryptocurrency, is in the process of upgrading to Ethereum 2.0, which involves a transition from the PoW to the PoS consensus mechanism. The switch to PoS was implemented in 2022, as it offers improved security, lower energy consumption, and better support for implementing new scaling solutions compared to the previous PoW architecture. For more information, visit https://ethereum.org/en/developers/docs/consensus-mechanisms/pos.

To sum up, Proof of Work (PoW) and Proof of Stake (PoS) are both consensus mechanisms utilized in blockchain technology to ensure the validity of transactions and network security. PoW is considered the most secure due to its resilience against attacks but has drawbacks including high energy consumption and centralized mining power. PoS was developed to address PoW's limitations, providing a more energy-efficient and eco-friendly solution. Ethereum 2.0 has chosen PoS as its consensus mechanism due to its benefits, such as improved scalability, decentralization, and lower energy consumption. Nevertheless, PoS also has its challenges, such as the possibility of staking power centralization and the requirement for high network participation for security. Ultimately, choosing between PoW and PoS depends on the specific needs and priorities of a blockchain network.