A consensus algorithm is the way a blockchain network reaches an agreement that the block being produced is correct. Although there are a variety of consensus algorithms (and more are being produced all the time) the two main types are Proof of Work (PoW) and Proof of Stake (PoS). In this article we will explore each and outline the differences between the two.
Proof of Work
Think of Proof or Work like a competition. Every time a transaction is made, all the miners on the network are made aware that a transaction needs approval. Once the transaction is broadcasted to the network, all the miners work to find the solution.
Each miner has a computer (or multiple computers) that work to find solutions to these math problems. Once the computer finds the solution, it is broadcasted to all the other miners in the network. These other miners check the successful (or unsuccessful) miner’s work. If everything checks out, the transaction is approved and the network moves on to the next transaction. If the solution is not correct, that block is rejected by the network.
Proof of Work takes it’s name from the work that the computers must do to prove a transaction is valid. Any transaction that has made its way into a block is there because work was done to prove it should be there.
Proof of Stake
Proof of Stake works a bit differently. The end goal is to approve transactions but it is not as much of a competition as Proof of Work is. Under Proof of Stake individuals that hold on to their coins are rewarded. By not spending the coins the individual is given the chance to create blocks and earn additional coins.
Everytime a block needs to be created the network will choose one of the participants to create it. There are a variety of protocols that manage this. For example, the simplest form of PoS dictates that one coin equals one vote. One coin is chosen at random amongst all the coins that are being staked and the owner of this coin is given the right to create the next block. However, this methodology means that the richest individual will have the best chance of being chosen.
Additional methodologies were created to combat this problem. Delegated Proof of Stake is a system in which individuals vote for delegates and these delegates are allowed to create blocks (but no one else). A coin aging system has also been used. This means that whenever someone is chosen to create a block their coin “stack” age is reset. Ultimately they are less likely to be chosen again for some time because coin stacks with an older age have precedence in this situation.
Comparing The Two
Proof of Work has proven it’s resilience over time. Most of the oldest blockchain networks like Bitcoin and Litecoin have proven that this method works. The network is backed by the total investment made by all the miners in the hardware they use to approve transactions. Many proponents state that this is a huge advantage over PoS.
However, networks that rely on PoW consensus can be vulnerable to attack. If one miner gains 51% or more of the approval power in the network they can control what transactions are approved because they can reach consensus by themselves. Several networks have been attacked recently – Verge is a good example.
Proof of Work also uses a ton of electricity and this is bad for the environment. Recently Bitcoin energy consumption has been growing to enormous proportions – this study by Joule notes that the Bitcoin network uses as much electricity as Ireland does in a year. This is concerning especially in an age in which nations are conscientious of the amount of energy they consume. Proof of Stake doesn’t have these issues.
Proof of Stake hasn’t been around as long as Proof of Work and teams are still experimenting to understand what the ideal PoS system looks like. PoS has the potential to scale above that of networks that utilize PoW. The amount of transactions that a PoS system can validate per second is higher than that of Proof of Work and this will matter once more people adopt using cryptocurrency.
Proof of Stake can fall victim to a 51% attack though. For example, in a Delegated Proof of Stake system a group of people or organizations can form a coalition. By cooperating with each other they can control a majority of the network.
So Which Is Better?
It’s difficult to say which consensus protocol is better at this point in time. Proof of Work has proven it’s reliability over a long period of time but it’s ability to scale is limited at the moment and projects such as Bitcoin are looking into second layer solutions to remain relevant.
Proof of Stake is still being tinkered with and this technology is very exciting. It’s ability to scale is superior and projects should move in this direction as cryptocurrencies become more popular. But Proof of Stake still needs to be proven to work effectively and securely over a longer period of time before it is crowned as the superior option.
This technology is always changing and new consensus mechanisms might win out in the long run. A good example is the Tangle feature employed by Iota. It will be important to track these developments to make sure your favorite projects are staying relevant.