Proof of work vs Proof of stake

In this article I want to summarize the most relevant characteristics of both consensus protocols, based on the pillars of the blockchain, security, scalability and decentralization, among other approaches.

First of all, you must understand that the entire blockchain is an accounting ledger, which records movements of money over time, and has a consensus method to be able to record those transactions, based on a protocol that uses an algorithm, so that a node at the same time validate blocks, and the rest of the nodes agree, and the chain is forged consecutively and ordered in time.

The Proof of Stake algorithm (PoS) is a consensus protocol that proposes the validation of blocks through proof of possession of cryptocurrencies, and thus a node is chosen to forge a block.

A Proof of Work (PoW) System is a system that requires the validator node, that is, the miner, to perform work at a cost of time and energy consumption. The work consists of performing a computation with different degrees of difficulty.

Why is consensus used?

In distributed networks there should be no central authority. Consensus means that the majority of the participants (the validator or mining nodes) agree on a certain version of the truth, (the ledger records), at a given time. This is how the power of decision is distributed.

Persistence and Security

Persistence is the ability to continually add new blocks. Security means that only valid blocks will be added. Both qualities complement each other.

Bitcoin persistence is high as there is a competition between all mining pools to propose a block. So if one fails, another will be ready. In this way it is ensured that a new block is eventually prepared at a given time. However, it is a slow process that takes about 10 minutes (not exact).

The PoS protocol actively participates in choosing the node with the right to create a block. The chosen node will produce a block in a certain interval, having to insert a cryptographic proof in the transaction validation, and all other nodes can verify it. Because block allocation occurs at the start of an epoch (time period), if the node is unavailable for any reason (eg offline), the interval remains empty (no blocks). However, this situation is compensated by the fact that an interval only lasts 20 seconds. So there is a high probability that after the next 20 seconds another available node will produce a block. We could see block production delays only in the event that no more nodes were available at a given time. Eventually, some running node gets the right and produces a block. We can conclude that the persistence is also high compared to Bitcoin, mainly because the period for block production is shorter.

Still, Bitcoin could be considered a bit better if we don’t care about other variables like block irrevocability, transaction speed, and fees.

Decentralization

The more powerful the PoW participant is, i.e. the one with a higher hash rate, the more often he wins.

This has led to consensus management in mining farms, where individual miners delegate their hash rate to pool groups for a higher chance of reward. Mining competition in PoW has led to having few entities that collect decision power. Currently, in 2022, more than 50% of the consensus is in 3 mining farms.

In PoS all users with ADA can participate in a consensus algorithm, the validator nodes with the technology and their funds, and the delegators with their funds in cryptocurrencies and delegate them to a stake pool. When the user’s ADA succeeds in creating a block, the pool will create the block on behalf of the user. Stake pool operators and users will be rewarded. In this way, all users are incentivized to participate in decentralization.

The main difference in terms of incentives is that in PoW the winner takes all, both the new coins issued and the fees for that block, while in PoS the rewards are distributed by first assigning a participation margin to the operator and the rest in the form of proportional to the funds between the stakepool operator and its delegators. In PoW, holders cannot participate in consensus, unlike PoS, which decentralizes incentives.

PoS rewards participants proportionally and fairly based on the holding of funds the users have. Not so in PoW where a few participants get most of the rewards, and small individual miners have almost no chance of creating a block.

The advantage in PoS is that the incentives tend to be more decentralized in their distribution than in PoW.

The disadvantage in PoS can be the concentration of funds in a few hands, where the whales generate a plutocracy in the consensus.

Security

A blockchain is secure when it is not possible to change the history of the ledger arbitrarily and only new transactions are recorded respecting the general consensus.

The ledger is distributed on many computers around the world. The attacker has no chance to find all computers and try to change the ledger of all hard drives at the same time.

The security of the PoW is based on its hash power, that is, the more participants there are in the network, the more powerful and secure it becomes. PoW electricity consumption is the largest cost.

In PoS, hash power is replaced by science and mathematics, where the protocol randomly chooses the validator node of each block, weighing better luck for the node with more delegation. So PoS is more complex and there may be a higher chance that something will go wrong or you will be attacked in a vulnerability of your code.

Scalability

Scalability is the ability to process all transactions in the blockchain (layer 1) in a set time, as new users join the network. It is easy to scale when the network is used by only a few people. However, it is getting more and more difficult as the number of users gradually grows.

L2 scaling is not considered as scalability of the blockchain (L1), but as a complement that allows increasing scalability in the ecosystem.

Generally PoW produces blocks at a lower frequency of time than PoS, due to hash difficulty management. For example, in the Cardano PoS, blocks are forged every 20 seconds against the 10 minutes of the Bitcoin PoW. This comparison is based on time, but you must also consider the size of the transaction and other parameters such as latency, to define the speed of network processing, which is measured in transactions per second (TPS).

Therefore, it is not possible to say that one protocol is faster than another, in general.

We see that, with the configuration as of July 2022, in PoW, Bitcoin with a block size of 1 MB processes ~7 TPS and Bitcoin Cash, with a block size of 32 MB, is capable of managing 25,000 transactions per block, through a network stress test performed in September 2018, or ~42 TPS. Cardano, with PoS, can process up to 88 KB every 20 seconds, that is 2640 KB or 2.58 MB in 10 minutes, with ~60 TPS for average size transactions (no smart contracts, no metadata, no large token bundles, etc.).

Also, among other scalability methods, PoS allows to introduce Sharding, so in the future we can expect thousands of transactions per second. Sharding is dividing the blockchain into individual segments or Shards, where each segment will have a unique set of smart contracts and account balances, thus increasing transaction performance.

As we can see, PoS can be more scalable in its L1, in theory, through other methods than just increasing the block size or decreasing the weight of each transaction.

Fees per Transaction

Transaction fees are part of the scalability, since very expensive fees do not encourage the use of the network.

The fees are influenced by two aspects. Firstly, because of the number of transactions that the network is capable of processing at a given time and, secondly, because of the cost required to keep the network running.

The two most used systems for calculating fees are the auction (market fee) and the fixed one. Bitcoin uses the market fee method, that is, the greater the use of the network, the cost of the fee increases so that a transaction is processed faster. Cardano has a fixed fee system, and it only increases in cost by the weight of the transaction (NFT or smart contracts are heavier), and does not depend on network activity.

The system is more scalable if it processes a greater number of transactions with accessible fees, and that do not increase prices. In this case, in theory, the Cardano PoS looks better performing.

Sustainability

Sustainability implies the continuity over time of a system with adequate incentives. If costs go up and revenues go down, of course there is no such thing as sustainability. PoW requires large energy consumption over a period of time, unlike PoS.

This relationship is not new, there has been a lot of talk, and I am not referring to ecology and its defenders who say that Bitcoin is harmful, but to the fact that with high energy costs, the PoW network is only sustainable when miners can develop activity with high prices in the cryptocurrency price, so that its rewards can exceed the costs, and in addition there must be activity of use in the network, since the greater the use, the more fees and the less need for high prices of the cryptocurrency.

I appreciate your contribution to encourage my articles

₿itcoin

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₳da (Cardano)

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