introduction
In a blockchain network where the participants remain anonymous, a reliable coordination mechanism is essential. Evidence serves as confirmation that a participant has met the validation requirements for a set of transactions, demonstrating that they are participating in good faith. One such consensus algorithm used to generate new blocks, distribute new cryptocurrency, and validate transactions is proof of stake (PoS).
This mechanism provides an alternative to the original consensus method, Proof of Work (PoW). Instead of spending the energy required by PoW, PoS requires validators or miners to make contributions to the network from their own holdings of the blockchain’s native cryptocurrency, i.e. their “stake”.
To avoid losing their stake, the auditors are motivated to act honestly and reach consensus on the order and validity of the transactions. POS miners are selected based on how much cryptocurrency they own or their “share” in the network; Therefore, the more stakes a validator has in a cryptocurrency, the more likely they are to be chosen to generate the next block.
Read more >> Technical Guide to Proof of Stake
Compare with proof of work
Instead of bets, PoW requires significant computational resources and energy consumption to validate transactions and generate new blocks. For this reason, people assume that Proof of Stake is more energy efficient and less resource intensive than Proof of Work. However, we will learn later in this article that this is a rather wrong assumption.
The two consensus mechanisms aim to generate new blocks and verify transactions. They also have to maintain the security and integrity of the blockchain network, but they do so in different ways.
In PoW, miners compete to solve the Byzantine Generals problem faster and reach a consensus on the validity of transactions. The fastest miner to complete the target hash creates a new block and receives the block reward, which is the network token with the token value. By choosing the chain with the most work, the network overcomes any ambiguity, and double-spending is prevented because at least 51% of the global hashing power is needed to catch up on the double-spend block.
In Ethereum POS, by comparison, the problem of double spending is solved by using “checkpoint blocks” at different points in time, which are approved by a two-thirds vote by stake to “reassure” everyone in the network about the “true” system.
Another important difference between PoS and PoW is the incentives and ethics behind them. In a POS network, incentives mask a negative (punishment-based) connotation because validators may lose their stake if they act maliciously. This contrasts with Proof of Work (PoW), where miners are only incentivized to act honestly in order to be rewarded with cryptocurrency through a positive (reward-based) incentive system.
Bitcoin miners who attempt to break the rules by producing poorly formatted blocks or invalid transactions will find their blocks ignored by full nodes. As a result, they will incur significant electricity costs. Furthermore, they would need to acquire 51% of the hashing power to build on the legacy blocks; Otherwise, these chains would fall behind, wasting energy at a costlier rate.
One of the most heated debates in consensus mechanisms is decentralization and the ability to maintain this decentralization. PoW decentralization is secured by an active network of full nodes, as well as miners, which is a vital feature that is not reflected in PoS consensus mechanisms. The importance of nodes in PoW was highlighted in the 2017 block war when small block proponents won the battle against large blockers by starting a user-activated soft fork (UASF) movement voting for the BTC chain instead of Bitcoin Cash (BCH). This historic Bitcoin event confirmed how nodes can win against big corporations and that miners do not control the network, unlike POS validators.
How does proof of stake work?
In a proof-of-stake network, participants can be miners or validators who verify and authenticate transactions and generate new blocks based on how much of the original cryptocurrency they own or their “stake” in the network.
Validators are randomly selected to add the next block based on their stake; The more cryptocurrencies a validator bets on, the more likely they are to choose to validate transactions and generate new blocks.
When a validator is chosen to create a new block, they need to validate all transactions in the block and add them to the blockchain. To validate transactions, the validator must verify that they are valid, not “double-spended,” and that the sender has enough cryptocurrency to perform the transaction.
Once all transactions in the block are validated, a new block is created and added to the blockchain. At this point, the successful validator is rewarded with authentic tokens for their work.
In a proof-of-stake network, consensus is achieved when most validators agree on the state of the blockchain. If a validator creates a block that is not accepted by the majority of validators, the block will be rejected, and the validator may lose its cryptocurrency.
Valid criticisms of proof of stake
Although Proof of Stake is often seen as more energy efficient and less resource demanding when compared to Proof of Work, these assumptions can be easily refuted, showing that decentralization and security are compromised by Proof of Stake and that POS is a mirror image of the current . The cash system, which is known to be particularly energy inefficient, as well as unfair to the majority of participants.
One of the main arguments against the perceived advantages of proof of stake is the concentration of wealth and power it can lead to. In a PoS system, validators with a larger stake (or wealth) have a higher probability of being chosen to validate transactions and generate new blocks. This results in a get-riches-gets-riches scenario, with wealthier validators gaining more control and influence over the network. The table below from Nansen Research provides a clear picture of the storage landscape within Ethereum’s PoS system.
This concentration of power runs counter to the principles of decentralization, whereby a small number of auditors can dominate decision-making processes. Unlike Proof-of-Work, where miners have to invest in computational power, Proof of Stake allows validators to accumulate wealth and control the network based on their initial stake, rather than their ongoing contributions to the system.
Another valid criticism of Proof of Stake is the pre-mining formations on which many cryptocurrencies are based, including ether (ETH). Mining the tokens before their public launch means that founders, stakeholders and developers can access a lot of wealth and have a huge advantage over any other investors or validators who later join the network. While such a design can also apply to Proof-of-Work blockchains, it is often used in Proof of Stake ecosystems, because in such systems, it is possible to gain a larger share of the verification process, due to the absence of nodes.
Common criticisms of the POS consensus mechanism:
- Lack of decentralization: Validators who own a large amount of cryptocurrency have a higher chance of being selected to generate new blocks, get rewards, and have more influence on the network, leading to the concentration of power in the hands of a few validators. This could lead to a situation where a small group of auditors controls the network and its rules, which could jeopardize its security and decentralization and promote wealth inequality.
- Validation can be manipulated: Since the network can be manipulated by owning 51% of the tokens in circulation, it is easier to affect transaction validation than a 51% PoW attack, which requires control of 51% of the current computations Network has power.
- Security: In PoS, the integrity of the network depends on the amount of cryptocurrency held by validators, which makes it more vulnerable to attacks if a large number of validators collude.
- Complexity: There are different types of PoS, such as delegated point of sale (DPOS), leased point of sale (LPOS), pure point of sale (PPOS), and other hybrid types. These are all variants of a hyper-engineering system, which is hard for anyone to really explain and understand. The more complex the system, the more likely it will fail.
- Environmental Impact: Proof of Stake (PoS) is often criticized for its environmental impact, reflecting concerns associated with the current monetary system. Unlike Proof of Work (PoW), which incentivizes energy expenditure, PoS systems are less energy intensive. However, the proliferation of blockchains that rely on inefficient PoS mechanisms en masse exacerbates their environmental footprint.
- Nothing at stake problem: The nothing at stake problem is a point-of-sale theoretical weakness where validators don’t lose much by creating multiple versions of the blockchain. In a PoS network, validators can create multiple versions of the blockchain, with the hope that the one version becomes the “correct” one. This may lead to a situation where the network cannot reach a consensus, jeopardizing its security.
- Difficulty determining the right amount to bet: Determining the optimal amount of cryptocurrency to participate in the POS network is a challenge. Auditors must balance the desire for higher rewards with the risk of losing their stake.
Will Bitcoin Move to Proof of Stake?
Ethereum’s recent shift from PoW to PoS in September 2022 has sparked thoughts across the institutional ecological world that Bitcoin should do the same and thus forego the “excessive energy consumption” required by its consensus mechanism.
Changing Ethereum to a PoS system will not reduce energy consumption by 99.95%, because it does not take into account that expensive companies and farms use huge amounts of energy to support the work necessary to complete PoS transactions globally.
Greenpeace’s “Change the Code” campaign funded by Ripple Labs to discredit the energy use of Bitcoin’s PoW system is a typical example of how the corporate world discourages change and instead encourages the commission of an elitist system that is now fully reflected in Ethereum’s consensus mechanism.
Besides proposing a new revolutionary and fair monetary system, PoW promotes renewable energy innovation and use of wasted and stranded energy that will benefit the environment more than a PoS system that is supposed to be energy efficient in the long run. PoS is only better at hiding energy purchases made by companies that enable the validation mechanism.
Fortunately, the Bitcoin code is very resistant to these types of attacks and was intentionally developed in this way. It is unlikely that any proposal to change the code will pass any preliminary stage of consideration by the developers, let alone the community.
Conclusion
In free markets, it is important to allow proof-of-work (PoW) and proof-of-stake (PoS) mechanisms to co-exist and evolve in ways that are profitable and beneficial to the respective backers. Bitcoin, as an innovative monetary system, not only achieves technological advancement but also strives to make a positive impact on the environment. Educating individuals about the importance of proof of work in this transformative process is a responsibility that bitcoin enthusiasts understand and embrace.
If you are interested in protecting wealth, financial inclusion, and promoting a better environment for all life on Earth, the perfect choice is Borderless, Permissionless Currency, embodying the original hard money and freedom technology.
This type of money, which is uncensored and safe from forfeiture, highlights the superiority of Proof of Work over Proof of Stake. In the coming years, Bitcoin will likely be the only token of value, and the decision to support Proof of Work will be seen as apparent in hindsight.
