Cryptocurrency proof of work vs proof of stake
In proof-of-work, verifying cryptocurrency transactions is done through mining. In proof of stake, validators are chosen based on a set of rules depending on the "stake" they have in the blockchain, meaning how much of that token they commit to locking up to have a chance to be chosen as a validator. In either case, the cryptocurrencies are designed to be decentralized and distributed, which means that transactions are visible to and verified by computers worldwide.
Computers on the network have to agree on what happened to verify transactions. If a computer tries to manipulate or commit fraudulent transactions on a network, it will be known through the public, immutable nature of the blockchain. Both consensus mechanisms have economic consequences that penalize malicious actors who try to disrupt the network.
Proof-of-work vs. Proof of work is a competition between miners to solve cryptographic puzzles and validate transaction in order to earn block rewards. Proof of stake implements randomly chosen validators to make sure the transaction is reliable, compensating them in return with crypto. Each choice has unique advantages and disadvantages. Downsides of proof-of-work Proof-of-work requires a significant amount of energy to verify transactions. Since the computers on the network must spend a lot of energy and operate a lot, the blockchain is less environmentally friendly than other systems.
Another problem some raise is that because of the competition between miners for rewards, a small number of mining pools control the blockchain, a kind of de-facto centralization. It is important to note though that mining pools are made up of individual miners or smaller groups of miners who are free to pull their hashpower if they no longer agree with the direction of the larger mining pool.
Any system that uses proof of work will naturally re-centralize. In the case of Bitcoin, this ended up putting a handful of big companies in control of the network. How proof of stake works Proof of stake, first proposed on an online forum called BitcoinTalk on July 11, , has been one of the more popular alternatives.
In fact, it was supposed to be the mechanism securing Ethereum from the start, according to the white paper that initially described the new blockchain in To become a validator and to win the block rewards, you lock up—or stake—your tokens in a smart contract, a bit of computer code that runs on the blockchain. Never miss a breakthrough Sign up to receive the latest emerging tech stories in your inbox, every weekday.
An algorithm selects from a pool of validators based on the amount of funds they have locked up. Proponents also claim that proof of stake is more secure than proof of work. To attack a proof-of-work chain, you must have more than half the computing power in the network.
In contrast, with proof of stake, you must control more than half the coins in the system. As with proof of work, this is difficult but not impossible to achieve. The plan is to merge it with the main Ethereum chain in the next few months. After the blockchains merge, Ethereum will introduce sharding , a method of breaking down the single Ethereum blockchain into 64 separate chains, which will all be coordinated by the Beacon Chain.
Shard chains will allow for parallel processing, so the network can scale and support many more users than it currently does. Many see the inclusion of shard chains as the official completion of the Ethereum 2. A risky move None of this comes without risks. Thousands of existing smart contracts operate on the Ethereum chain, with billions of dollars in assets at stake. And though staking is not as directly damaging to the planet as warehouses full of computer systems, critics point out that proof of stake is no more effective than proof of work at maintaining decentralization.
Those who stake the most money make the most money. Bitcoin has been around for over a decade. Several other chains use proof of stake—Algorand, Cardano, Tezos—but these are tiny projects compared with Ethereum. So new vulnerabilities could surface once the new system is in wide release. As Ethereum transitions to its new protocol, another risk is that a group of disgruntled miners could decide to create a competing chain. All of the smart contracts, coins, and NFTs that exist on the current chain would be automatically duplicated on the forked, or copied chain.
Something similar happened in , after Ethereum developers rolled back the blockchain to erase a massive hack. Some community members were so upset they kept mining the original chain, resulting in two Ethereums— Ethereum Classic and what we have today.
If it happens again, the success and mining power behind any competing version of Ethereum will depend on the value of its coin in the open markets. The question is, will its new system fulfill all the promises made for proof of stake? And how decentralized will it really be? You end up doing all that work—consuming vast amounts of energy or staking all those coins—for nothing other than maintaining an illusion.
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