PoS vs PoW - What's with the techy acronyms being everywhere?
You may have encountered PoW (Proof-of-Work), and PoS (Proof-of-Stake), but what does it mean?
TL;DR: Blockchain have decision making algorithms that determine who gets to add their John Hancock to the chain. Which is better? Unknown, it’s all trade-offs.
Hi all,
In my quest to explore my curiosities, one of the things I repeatedly stumbled into are the words “proof-of-stake” (PoS) and “proof-of-work” (PoW). While I thought I knew about them, I didn’t know them enough to explain them.
On a side note, I’ll be going to a NFT Talk in Irvine on Thrusday, March 25, and then I’ll most likely be going to the Bored & Hungry NFT/Web3 Popup in Long Beach on April 9. I still don’t know the real-life impact of NFTs, so I’m on a mission to find the pioneers who are making that happen.
As always, you can find TL;DRs and graphics wherever possible!
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How is data agreed upon?
How do the PoW and PoS mechanism work?
Which one is better?
TL;DR: Consensus algorithms, which is the underlying decision making protocol on a blockchain, determine who gets to add data to the master ledger, and how it gets agreed upon by everyone else.
When it comes to record-keeping of data in circumstances where there are multiple computer systems that are distributed (distributed = multiple software based systems that are installed in multiple computers, but are intended to act as one system.) computer software needs to have a place a form of consensus algorithm, or decision maker.
In blockchain, consensus algorithms essentially help computer systems agree on what piece of data is '“more right” than the other. To do this, a node (let’s call it the head chef) is assigned and the head chef can determine what’s next on the menu and serve it to everyone. Now how the next head chef is determined, well that’s where the consensus algorithm comes in.
Take a look at this chart of different consensus algorithms.
There are a lot of different ways to determine who will be the head chef at the time to serve the next item on the menu.
The most popular consensus algorithms today are Proof of Work (PoW), which is used by Bitcoin and the current Ethereum, and Proof of Stake (PoS), which Ethereum is supposed to transition to, and Solana.
TL;DR: PoW = Solving puzzles through trial and error that contain blockchain transactional data and getting rewarded for it; PoS = Betting on the accuracy of data, with the risk of losing some of your stake if you’re wrong.
Proof-of-Work
To determine who “the next head-chef” will be to write the next block that will get added into the blockchain, Proof-of-Work relies on miners. Miners use energy (a lot of electricity) to make massive computations to solve puzzles. These massive puzzles all the normal business-like transactions that are occurring on the blockchain, with an incentive gold nugget - in this case a Bitcoin or Ethereum reward.
Imagine 10 people who don’t cook or shop at a grocery store, looking for tomatoes. Not just any tomato, San Marzano tomatoes. They’ve never seen this tomato before, and they have no idea what it could possibly look like. They are tasked to find this particular tomato at a store, and whomever finds it first, will be rewarded with 30 bags of Oreos.
These 10 people are at the grocery store, running around for the first time. 1 shopper finds a can of tomatoes, but when they went to scan it, the system said it was incorrect. Another runner finds another can of tomatoes, runs to the front, and the system confirms that that is the right can of tomato. They are rewarded with 30 bags of oreos. That individual gets to add their can of tomato to the shopping cart, and the rest of the people have to accept that outcome.
If you can imagine based on this analogy that running around is energy intensive for everyone, well, you’re right. Proof-of-Work relies heavily on raw computational power to trial and error its way into the right answer.
Proof-of-Stake
Now, with Proof-of-Stake, it’s a lot different. While the goal is to determine who can add to the blockchain, the way it determines who can add is nothing like Proof-of-Work.
Under a Proof-of-Stake model, individuals “stake” their crypto. Imagine staking like betting. The individual bets their crypto, which makes them eligible to be a validator. Since that individual is a validator, the Proof-of-Stake protocol within that blockchain will randomly select an individual to process the next block of transactions.
The validator confirms the accuracy of the data and adds it to the block. Other validators will confirm the accuracy, and if it checks out, the first validator gets rewarded in the form of a transaction fee. The reward is lower than mining.
Here’s the kicker.
There is also a chance that the first validator is confirming inaccurate information. If this is the case, and subsequent validators can confirm the inaccuracy of the first validator’s math, then there is a penalty applied from the first validator in the form of crypto loss.
That’s right, if you’re inaccurate, you lose a portion of what you stake, or bet. Consider it skin in the game to play the game.
TL;DR: It depends. And does it matter?
Going to be frank, it’s a trade-off game based on the needs or restrictions of our time. Right now Proof-of-Work, as secure and reliable as it is, takes too much energy to maintain. And it currently incentives large scale mining operations to get rewards, but these large scale mining operations don’t have a material impact on the blockchain itself.
Proof-of-Stake hasn’t been tried in large scale blockchain networks. It innately doesn’t used as much power as PoW and thus does not incentive hardware operations. What it does incentivize is people holding their Crypto and not using it in the market though, so hoarding Crypto can be a problem in the future. There’s also a potential governance problem since the people who hold the most Crypto can greatly influence the rules of the network at a protocol level.
I will challenge you and ask this: Do you, as an average consumer and possible average user of Crypto, need to care about the protocol?