The fundamental difference between the Proof of Stake (PoW) model and the Proof of Work (PoW) model can only be understood by reviewing the history of cryptocurrency and blockchain technology. If we go towards the origins of the first blockchain-based digital currency, i.e., Bitcoin, the cryptocurrency was created as a reaction to the distrust in the global financial system caused by the big banks (who people felt had a role to play in causing an economic collapse). Because of such distrust, people felt unsafe handing their money to centralized financial institutions.
The original creators of Bitcoin designed the Proof of Work (PoW) blockchain model that created a secure method to store your funds, fundamentally making it impossible for any outside authority (such as any government) to gain access to it. But while the PoW model promised security, the heavy electricity consumption required as a trade-off when mining became the primary argument against the currency’s adoption. For the market to grow, an alternative was required as well. The “Proof of Stake (PoS)” model emerged, designed to operate in such a way that mining would not be required.
This is not a problem for trading platforms like Immediate Alpha that can handle both PoS and PoW models, but the issue of power consumption is worth considering when you are looking at holding your coins for a long period.
Today, both Proof of Work (PoW) and Proof of Stake (PoS) models are being used by different projects. Both models have their own trade-offs, which must be looked at if we are to assess which one has better utility with less downside.
The Proof of Work (PoW) Model
When the concept of ‘decentralized systems’ was first proposed, there needed to be a way for the network to run without the need for a central authority operating everything. The Proof of Work (PoW) proposed a consensus-based method by which volunteers from all over the world would share processing power to a common blockchain network. The model incentivized volunteers who would “mine” in order to update and run the blockchain. The “miners” would be rewarded in cryptocurrency (such as Bitcoin) that could then be cashed as regular real-world money.
The most famous cryptocurrencies using the PoW model include Bitcoin and Litecoin. Because the entire cryptocurrency market follows Bitcoin, it can be argued that even today the PoW model dominates the crypto ecosystem.
The Proof of Work (PoW) model was first used by Bitcoin and provided an extremely secure method of storing your funds. The encryption that PoW provided is extremely secure and has never been compromised. Even today, Satoshi Nakomoto’s wallet holds tens of billions of unclaimed dollars, that no hacker has been able to access due to the secure nature of the network. The security exists due to miners all over the world solving complex puzzles that in turn support the functioning of a cryptographic system, which becomes more complex to solve as more miners join the system.
Mining, Processing Power, & the Electricity Consumption Trade-Off
While the Proof of Work (PoW) model is able to provide high security, the trade-off is the large processing power required. Powered typically by mining, the PoW model is a sort of race between miners to solve a puzzle, with the first one to solve it being rewarded. Because the model incentivizes miners to have high processing power at their disposal to solve the puzzle first, this in turn raises the overall electricity consumed by the network. The high-power consumption attached to the PoW model has been a critical point of concern when talking about scalability. Environmental concerns have also created a mainstream argument against miners, with certain countries such as China banning miners altogether.
The Proof of Stake (PoS) Model
Like the PoW model, the Proof of Stake (PoS) model is built on a consensus-based algorithm, where the core philosophy of keeping any central authority out of the blockchain network remains the same, as volunteers participate to keep the blockchain running. But unlike PoW where miners pool their computational power to keep the blockchain running, PoS requires participants to pool their funds through staking.
For any transaction taking place on the blockchain to be validated, the validator is chosen based on the number of funds staked. The more money you have staked on the blockchain network, the higher the chances of you being selected as the validator.
Lower Power Consumption
Because actual hardware that is required to solve complex puzzles is not there, the Proof of Stake (PoS) model inherently requires relatively less power consumption in order to keep the network running. The network validates transactions and functions based on the amount staked by participants, thus removing the primary issue of environmental hazards that mining created.
Easier to Scale
When we talk about scalability, the issue that arises with PoW is that better hardware that has higher computational power is required as time passes on because the complexity of the “puzzles” that need to be solved increases. Not only does this increase the overall processing power required by the system over time, but it also makes it harder to scale the system.
Today, new cryptocurrency projects choose to build over a Proof of Stake (PoS) model because it is easier to scale. Many within the cryptocurrency community see PoW as outdated, as it was adopted to be used in currencies like Bitcoin and Litecoin when there was no alternative at the time. Since the rise of PoS, many have preferred it as a better option. Ethereum’s famous transition from PoW to PoS is a primary example of projects adopting the newer model in order to scale better.
The Concerns of 51% Rule in PoW & the Safety in PoS
The 51% rule is a scenario known within the crypto-community especially for Proof of Work (PoW) based networks, where miners take control of the majority mining pool and use it to hijack the blockchain network. Since the network runs on a consensus mechanism, any individual/group controlling 51% of the total consensus involved will obviously be in control, possibly creating fake blocks for themselves and invalidating other transactions.
Because of the nature of PoW, it is more likely that miners try to attempt such a scenario when mining rewards become too small. However, with Proof of Stake (PoS), the potential hijackers would need 51% of the total currency supply in order to take control, which is a very unlikely scenario to happen.
Final Verdict: Proof of Stake (PoS) or Proof of Work (PoW)
Despite the improvements that Proof of Stake (PoS) promises, it is unlikely that cryptocurrencies running on Proof of Work (PoW) will go away anytime soon. This is because Bitcoin (running on PoW) is unlikely to go away, which means miners are here to stay for long. However, many cryptocurrencies attempting to do more than Bitcoin, such as Ethereum, will probably move forward with PoS because it can maximize the utility that can be added by the project.
It is hard to argue against Proof of Stake (PoS) being a more efficient alternative, as it solves major problems such as scalability issues, power consumption, and the issue of high processing power required. This is why PoS is fundamentally more efficient than its predecessor, and will probably be adopted by more and more projects unless something better comes along. But at the same time, the high security that PoW provides will be a major reason why some tried and tested cryptocurrencies, such as Bitcoin, will also remain dominant.