TL;DR
Proof of Work (PoW) and Proof of Stake (PoS) are the most common consensus mechanisms. This mechanism is adopted by major cryptocurrencies to secure the network.
Proof of Work is used in Bitcoin to validate transactions and secure the network. PoW among other things prevents double spending. Blockchains are secured by participants called miners who use computational power to compete for the right to confirm new blocks and update the blockchain. Successful miners will be rewarded in the form of BTC by the network. As of December 2021, a miner can get a block reward of 6.25 BTC plus transaction fees by successfully mining a Bitcoin block.
The main difference between PoW and PoS is the way it determines who can validate blocks of transactions. Proof of Stake is the most popular alternative to Proof of Work. PoS is a consensus mechanism that aims to improve some of the limitations of PoW, such as scalability and power consumption issues. In PoS, participants are called validators. They don't need to use powerful hardware to compete for the chance to validate blocks. Instead, they need to stake (lock) the native cryptocurrency of the blockchain. Then, the network selects winners based on the amount of crypto staked who will be rewarded proportionally to the transaction fees of the validated blocks. The more coins that are staked, the higher the chance of being selected as a validator.
Introduction
To ensure that transactions recorded on a blockchain are valid, these networks adopt various consensus mechanisms. Proof of Work (PoW) is the oldest. This mechanism created by Satoshi Nakamoto is considered by most people to be the safest alternative. Proof of Stake (PoS) was created at a later date, but is now present in most altcoin projects.
Apart from Bitcoin, PoW is also used in many major cryptocurrencies such as Ethereum (ETH) and Litecoin (LTC). In contrast, PoS is used by Binance Coin (BNB), Solana (SOL), Cardano (ADA), and other altcoins. It is worth noting that Ethereum plans to switch from PoW to PoS in 2022.
What is Proof of Work (PoW) and how does it work?
Proof of Work (PoW) is a consensus algorithm adopted by the Bitcoin network and many other cryptocurrencies to prevent double spending. PoW was introduced by Satoshi Nakamoto in the Bitcoin whitepaper published in 2008.
In essence, PoW determines how the Bitcoin blockchain achieves distributed consensus. This mechanism is used to validate peer-to-peer transactions in a trustless manner without the need for a third-party intermediary.
In PoW networks, such as Bitcoin, transactions are verified by miners. They are participants who use a large amount of resources to ensure that the network continues to run safely and correctly. The miners' tasks include creating and validating transaction blocks. However, in order to compete for the right to validate the next block, they must use mining hardware that is highly specialized to solve complex mathematical puzzles.
The first miner to find a valid solution to this math problem will be entitled to add their block to the blockchain and receive what is called a block reward. The block reward consists of newly generated cryptocurrency plus transaction fees. The amount of crypto in a block reward varies based on different networks. For example, on the Bitcoin blockchain, a successful miner can earn 6.25 BTC plus fees from each block reward (as of December 2021). However, the amount of new BTC generated per block is reduced by 50% every 210,000 blocks (approximately every four years) due to a mechanism called halving.
If you want to learn more about the Proof of Work model in more detail, read What is Proof of Work (PoW)?.
What is Proof of Stake (PoS) and how does it work?
Proof of Stake (PoS) is a consensus algorithm introduced in 2011 as an alternative to Proof of Work. The goal is to overcome the scalability limitations of PoW networks. PoS is the second most popular algorithm adopted by cryptocurrencies such as Binance Coin (BNB), Solana (SOL), and Cardano (ADA).
Although PoW and PoS share the same goal of achieving consensus on the blockchain, PoS has a different way of determining who validates blocks of transactions. There are no miners on the PoS blockchain. Rather than relying on powerful computers to compete for block validation rights, PoS validators rely on their crypto holdings.
To be eligible to validate a block, participants must lock a certain amount of coins in a specific smart contract on the blockchain. This process is called staking. Then, the PoS protocol will assign a participant to validate the next block. Depending on the network, this selection can be done randomly or based on their stake. Selected validators can receive transaction fees from validated blocks as a reward. Usually, the more coins locked, the higher the chance of being selected.
Please read the Proof of Stake (PoS) Explanation for further details.
Perbedaan antara Proof of Work vs. Proof of Stake
Although both are consensus mechanisms that ensure the security of the blockchain network, there are several differences between them. Of course, the main difference is how PoW and PoS determine which participants validate new transactions. To get a clearer understanding, let's look at the table below:
Is Proof of Stake better than Proof of Work?
Proof of Stake proponents argue that PoS has several advantages compared to PoW, particularly regarding scalability and transaction speed. It is also said that PoS coins are less harmful to the environment compared to PoW. In contrast, most PoW proponents argue that as a newer technology, PoS has yet to prove its potential with respect to network security. The fact that PoW networks require a significant amount of resources (hardware, electricity, etc.) makes them more difficult to attack. This applies to Bitcoin as the largest PoW blockchain.
As mentioned, Ethereum (ETH) is expected to switch from PoW to PoS in the Ethereum 2.0 upgrade. ETH 2.0 is a long-awaited upgrade to the Ethereum network to improve its performance and address its scalability issues. After the implementation of PoS on Ethereum, anyone with at least 32 ETH will be able to participate in staking to become a validator and receive rewards.
Is PoS better than PoW? What made the second largest cryptocurrency by market capitalization adopt a new consensus mechanism?
Centralization risks
In a Proof of Work blockchain, mining involves the process of using computing power to hash block data until a valid solution is found. For today's major cryptocurrencies, such solutions are becoming more difficult to find and the process of guessing large numbers of hashes can be expensive with respect to hardware and electricity.
Therefore, some miners prefer to accumulate their mining resources in mining pools to get a greater chance of getting block rewards. Some large mining pools invest millions of dollars and control thousands of ASIC mining hardware to generate as much hashing power as possible.
As of December 2021, the top 4 mining pools control approximately 50% of Bitcoin's total hashing power together. The dominance of mining pools makes it increasingly difficult for individual crypto fans to mine their own blocks.
Then, how big is the level of decentralization of mining? On the one hand, no single entity can control the information on the network. If this happens, a 51% attack would be possible and the network could lose value. Some might argue that while it is still decentralized, mining is no longer very decentralized. Certain areas, mining equipment manufacturers, and energy producers still dominate mining and reduce the overall decentralization of proof-of-work blockchains.
The Proof of Stake consensus mechanism takes a different approach and replaces mining power with staking. This mechanism lowers the barrier to entry for an individual to confirm a transaction, thereby reducing the emphasis on location, equipment and other factors. Your staking is simply determined by the number of tokens you own.
However, most PoS networks require you to run a validator node to start confirming transactions. This action can be expensive to perform, but not as expensive as some mining tools. Then, customers stake their tokens behind specific validators, providing a model similar to pool mining. So, although it is easier for general users to participate in Proof of Stake, this mechanism is still susceptible to centralization problems such as pool mining.
Security risk
In addition to the risk of centralization, the fact that the top four mining pools own the majority of the hashing power of the Bitcoin network could potentially increase the risk of a 51% attack. A 51% attack is a potential attack on the security of a blockchain system by a malicious actor or organization that manages to control more than 50% of the network's total hashing power. Attackers can override the blockchain consensus algorithm and perform malicious actions for their own benefit, such as double-spending, rejecting or changing transaction records, or preventing others from mining. However, this is less likely to happen with Bitcoin due to the large size of the network.
On the other hand, if someone attacks a PoS blockchain, he must own more than 50% of the coins on the network. This will create demand in the market and an increase in coin prices that could cost tens of millions of dollars. Even if they perform a 51% attack, the value of their staking coins will drop drastically due to the network being compromised. Therefore, a 51% attack is almost impossible for cryptos that use PoS consensus, especially if the crypto has a large market capitalization.
Kelemahan Proof of Stake
Most people consider Proof of Stake to be a better alternative to Proof of Work, but it is worth noting that there are flaws in the PoS algorithm. Due to the reward distribution mechanism, validators with more staking assets can increase their chances of validating the next block. The more coins a validator accumulates, the more coins can be staked and generated. This has been criticized by some as “making the rich richer”. These “getting richer” validators can also influence voting on the network, as PoS blockchains often grant validators governance rights.
Another concern is the security risk for cryptocurrencies with smaller market caps that adopt PoS. As mentioned, a 51% attack is almost impossible for more popular cryptocurrencies, such as ETH or BNB. However, smaller digital assets with lower value are more vulnerable to attacks. An attacker could potentially gain enough coins to outperform other validators. They can exploit the PoS system by frequently being selected as validators. Then, the rewards obtained can be used for further staking and increase their chances of being selected in the next round.
Closing
Proof of Work and Proof of Stake both have a position in the crypto ecosystem. Additionally, it is difficult to say for certain which consensus protocol works better. PoW may be criticized for producing high carbon emissions during mining, but it has proven itself to be a secure algorithm for protecting blockchain networks. However, as Ethereum shifts from PoW to PoS, the Proof of Stake system may become more preferred by new projects in the future.
