Proof of Work vs Proof of Stake

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Proof of Work (PoW) vs Proof of Stake (PoS) continues to be a hotly debated topic amongst cryptocurrency commentators. Both algorithms help secure the integrity of cryptocurrency networks and aid them in achieving distributed consensus without a central administrator. PoW was instrumental in Satoshi Nakamoto’s solution to the double spend problem but other technologists have explored ways to achieve the same ends with different algorithms. PoS has tended to be a popular alternative to PoW, although it’s not the only proposed alternative  

Let’s briefly define what we mean by PoW and PoS. A PoW algorithm in a blockchain network uses the expenditure of energy to protect the order of transactions made on the network and signal majority decisions. Rewards are only doled out to those who follow the rules and do the work necessary to protect the integrity of the network. The unforgeability of energy expenditure and monetary incentives work together to protect a PoW blockchain. Alternatively, a PoS algorithm uses the unforgeability of cryptographic signatures and the economic value of the native network token as collateral to protect the integrity of a PoS blockchain. PoS leans heavily on economic incentives for its integrity while PoW security leans on energy expenditure for the same purpose.

In this post we’ll discuss the perceived advantages and criticisms of each algorithm.

Advantages of PoW

PoW algorithms are simple and tested, offer objectivity, and link the physical to the digital.

1) Simplicity. PoW algorithms are simple in the sense that no further mechanisms need to be included to punish bad behavior. To affect a PoW blockchain, good and bad actors alike will have to incur expensive property, equipment, and energy costs. There is less need for the designers of a PoW based protocol to design penalties for bad actors. Bitcoin and many other cryptocurrencies that leverage PoW have stood the test of time by supporting hundreds of billions of dollars of economic activity dwarfing the value protected by other algorithms. Time is the ultimate arbiter of usefulness and to date PoW has shown its worth pretty convincingly.

2) Objectivity. PoW adds some objectivity to a system of peers who have their own subjective views and goals. It’s easy for nodes in PoW blockchains to identify the proper chain to follow without consulting or trusting third parties. Nodes trust the chain with the most cumulative PoW which is an objective and easily identifiable measure. This comes in handy in worst case scenarios like large network outages or brief partitions of the network. Potentially competing blockchain histories can be reconciled and a canonical history can be agreed upon relatively quickly using PoW as an anchor for objective truth and majority decisions. Nodes that were knocked off can easily come back online and identify the proper chain.

3) Connecting the physical and digital. Proof of work is also lauded by its proponents because it links the physical world to the digital world. For many, attaching energy intensive hashes to blocks make a PoW blockchain more ‘real’ and less of a pure digital abstraction. Real physical resources have to be used to produce a valid block and serve to protect each block from later alteration. Any type of alteration or manipulation would require substantial physical resources. In essence, PoW blockchains leverage the laws of physics as a source of security and truth that is forever independent of the blockchain and its stewards.  

Criticisms of PoW

Proof of work blockchains are energy intensive, victims to economies of scale, and are theoretically vulnerable to a “Selfish Mining” strategy .

1) Energy expense. PoW by design is energy intensive and the Bitcoin blockchain has been criticized since its inception for this design choice. Many are concerned about carbon emissions, climate change, and the consumption of natural resources used to generate the energy for PoW mining. Bitcoin’s PoW mining has been painted as an energy hog or something fairly innocuous when compared to other environmental threats, depending on the source. While it is true that the Bitcoin network consumes as much electricity as many small countries, it’s also true that this constitutes a fraction of a percent of global energy usage. In a previous blog post, I address the “wastefulness” of PoW. The question of how much energy is necessary for a monetary and payment system fuels the quest for alternative solutions like PoS. Architects of these alternatives think they can simulate or even improve upon the benefits of PoW without the energy intensity of PoW.

2) Mining centralization. When Satoshi first architected Bitcoin, there was a vision of proof of work as “one CPU one vote” but that dream gradually faded away as miners started to upgrade to GPUs and later ASICs that are more powerful and efficient. Bitcoin mining has since become industrialized, pushing out any hope of a return to democratized mining on individual laptops. Bigger mining operations could mine more efficiently and their inputs could be purchased at a cheaper per unit cost. This dynamic of better performance and reduced per unit costs pushed a lot of small miners out and led to a rapid relative centralization of PoW based mining.

3) Selfish Mining. This last criticism is more theoretical and controversial than the ones above but is worth mentioning. In 2013, academics out of Cornell proposed a strategy called Selfish Mining that called into question Bitcoin’s incentive system. The professors proposed a strategy that incentivizes miners to collude to increase their revenue that was disproportionate to the hash power they dedicated to the network.

“The key idea behind this strategy, called Selfish Mining, is for a pool to keep its discovered blocks private, thereby intentionally forking the chain. The honest nodes continue to mine on the public chain, while the pool mines on its own private branch. If the pool discovers more blocks, it develops a longer lead on the public chain, and continues to keep these new blocks private. When the public branch approaches the pool’s private branch in length, the selfish miners reveal blocks from their private chain to the public.”

Advantages of PoS

Proof of Stake has no large scale energy consumption, offers more design flexibility and experimentation, and couples holding with validation.

1) Lower energy consumption. PoS security is highly incentive based, premised on miners or validators putting up collateral that could be taken away if caught acting dishonestly. Much of the impetus for PoS is avoiding the tremendous amount of energy PoW demands while preserving the same level and some say even higher level of security offered by PoW which intelligently designed incentive mechanisms could produce.

2) Flexible design. The flexibility of PoS is attractive to protocol designers who think they can solve some of the issues associated with PoW such as mining centralization. Protocol designers have more room to experiment with block selection methodologies and penalizing behaviors on the network. In addition a much greater number of PoS networks can exist because they all use a different native token or resource for security. All PoW blockchains are competing for the limited resource of energy, severely limiting the amount of PoW blockchains that could be supported.

 3) Strong stakeholder incentives. Many proponents like that validators of a PoS blockchain by definition have large financial stakes in their networks. This makes PoS potentially superior from the perspective of game theory because of the strong incentives created by linking large asset holders and security. A very large miner in PoW may theoretically hold very little of the PoW coin they’re mining. Whereas in a PoS system, a large validator by definition owns a large, vested economic interest in the PoS coin succeeding.

Criticisms of PoS

Proof of Stake is relatively untested and complex, suffers from the “nothing at stake” problem and subjectivity, and is self-referential through its coupling of asset holding, truth, and security.

1) Newer and complex. Compared to PoW blockchains, PoS is younger, hasn’t supported as much economic value to date, and is more complex because it has to simulate what PoW delivers with more design choices and a more complicated rule set full of contingencies. “Complexity is the enemy of security” is a well known saying of digital and physical security specialists. It’s very difficult if not impossible to think of every possible contingency in advance. This complexity doesn’t mean a PoS blockchain can’t successfully support a large amount of economic activity but it does make commentators and investors cautious.

2) “Nothing at stake” problem. Worst case scenarios pose issues to PoS blockchains that PoW doesn’t have to contend with. One commonly known issue is the “nothing at stake” problem which states that since there is not much if any economic costs associated with creating multiple competing transaction histories, attackers are free to do so at a low cost and it’s economically rational for other validators to build on each of the competing chains. Having many competing, potentially valid chains makes consensus around a true history very difficult. PoS advocates have proposed solutions for this problem through penalization schemes but this adds to the complexity of the protocol which has to monitor behavior of validators. Detractors of PoS also point out that when presented with multiple competing chain histories, nodes that are bootstrapping or have been offline for a while have no objective way of knowing the true chain without consulting some external social source.

3) Self-referential and disproportionate stakeholder power. The linking of holding with security and consensus gives disproportionate power to large holders of PoS tokens and this has been viewed as both an advantage and disadvantage. While this might create more incentive for holders to act in the best interests of the network, some prefer the decoupling of holding from security and consensus in PoW which potentially disperses power to more parties. Holders of PoS assets are the source of security and truth for the network with no independent source of truth outside their large holdings. Those that have to expend energy and resources doing the work in PoW usually have to sell much of their rewards to pay their operating costs which spreads holding of the assets to a broader range of participants. In addition, PoW miners are more vulnerable to disruption over time through technological advances, market competition, and the pure randomness of the physical world. However, PoS validators could in theory hold their positions almost indefinitely without the threat of disruption.

Conclusion

Experimentation with consensus protocols is still in its infancy. Getting a distributed network of participants to agree, compete, and coordinate reliably over time is a difficult task. The advantages and criticisms of PoW and PoS algorithms listed here shouldn’t be thought of as conclusive nor exhaustive. We look forward to increasing our understanding with the rest of crypto-land as time goes on.

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