What are the differences between the two blockchain consensus mechanisms?

With some of the recent price records of Bitcoin, Ethereum, Dogecoin, and other cryptocurrencies, the positive and negative aspects of cryptocurrencies have become a major focus once again. One aspect that is particularly controversial, is the huge amount of energy needed to progress and update the blockchains.
Most big coins use Proof of Work as a consensus mechanism, which is inherently inefficient and not sustainable. A newer alternative is Proof of Stake which hopes to improve upon the flaws of Proof of Work. Let’s have a look at some of the pros and cons of both concepts.
Proof of Work
Proof of Work is the most common method of achieving and maintaining consensus in a blockchain. It’s a way for one party to prove that a significant amount of computational effort has been made. All other parties can then verify the result with very minimal effort.
In the Bitcoin blockchain, this is done with a hashing algorithm (SHA-256). Hashing algorithms can be computed very quickly in one direction, but they are almost impossible to reverse. Every block in the blockchain contains a number of transactions and the hash of the previous block. The miners that want to progress the blockchain try to find a hash value for all of this data by adding an incremental integer until they find one where the hash value is below a certain numerical value. The threshold value can be adjusted to set the difficulty of the problem. This controls the likelihood of guessing the correct result and therefore ensures that the time between blocks stays roughly consistent.
Once a solution has been found, the person who got the result is rewarded with new Bitcoins and the transaction fees from the block. Then the process starts over with the next block. This is called mining because just like in traditional mining, new and very valuable resources are being found/created.
Modern graphic cards and especially ASIC miners can compute a hash value very quickly. Therefore, the number of attempts needed to correctly guess the next value is extremely high. The bitcoin network currently has a hashing power of 177 TH/s (that’s 177,000,000,000,000 hashes every second). As you can imagine, all of this computing power takes an enormous amount of energy.
Proof of Stake
Proof of Stake is another method of updating the blockchain. It removes the energy-wasting mining process that Proof of Work suffers from. To emphasize the differences, Proof of Stake uses another term for mining: Blocks are “forged” rather than “mined”.
To participate in the forging process, users need to own a certain amount of the currency and lock it into the network as their stake. The chance of winning a block increases with the size of the stake. The winning node can process all transactions in the block and append the block to the blockchain. It is also rewarded with all of the transaction fees of the transactions in the block. To prevent the wealthiest nodes from dominating the process too much, there are different methods of randomly selecting the winning node.
The first cryptocurrency to make use of Proof of Stake was Peercoin. While Proof of Work is still the most common method, more and more coins are using Proof of Stake. Ethereum, the second-largest cryptocurrency, has started to implement plans to switch from Proof of Work to Proof of Stake.
Pros and Cons
Power Consumption
By far the biggest problem of both of these methods is the power consumption needed for Proof of Work systems. The Bitcoin blockchain alone consumes more power than Argentina, which would place it in the top 30 of the most power-hungry countries. Proof of Work isn’t sustainable in the world’s path towards a greener future and coins that rely solely on Proof of Work will probably lose their value in the mid to long term. This makes the energy efficiency of Proof of Stake its biggest advantage.
Scalability
Besides power consumption, the number of transactions per second in Proof of Work is another big problem. The Bitcoin network can only handle up to 7 transactions per second (in reality more like 4 per second), which isn’t even close to enough to function as a global payment processor. Because the number of transactions is so limited, the transaction fees have gone up significantly in recent years and are now somewhere around 20$ for a single transaction, which doesn’t really work if you want to buy a coffee for 2$.
While Proof of Stake itself doesn’t improve scalability, it opens up the possibility to dramatically increase the number of transactions per second with a concept called Sharding or Shard Chains.
Decentralization
Another benefit of the Proof of Stake system is the barrier of entry. You don’t need to invest in expensive mining hardware, which makes it easier to participate in the forging process and more nodes in a network are beneficial against attacks. Although you still need a large investment to acquire enough coins for the staking threshold.
Security
A potential security problem for cryptocurrencies is the 51% attack. If a single entity controls 51% of the hashing power in a mined coin or 51% of the stakes in a staked coin, they can use their majority to rewrite the blockchain and add fraudulent transactions to their benefit.
However, this isn’t a real problem for Proof of Stake because, in order to gain a 51% stake in the currency, the attacker needs to own at least 51% of the coins, which is not only very expensive but also goes against the interests of the attackers themselves. When they own such a large share of the currency, they wouldn’t have any interest in lowering its value by an attack.
Also, stakeholders that are behaving maliciously and are caught can lose a portion of their stake, which further disincentivizes any attacks.
Infancy
A disadvantage of Proof of Stake is its relative infancy. It isn’t as battle-tested as Proof of Work, which may reveal problems when it is used in large-scale currencies like Ethereum.
Are the Rich Getting Richer?
One of the most common criticisms of Proof of Stake is that the rich are getting richer because you need a large amount of currency to be able to stake the network, and the chance to win a block is based on the size of the stake, i.e. the more coins you own, the more coins you get.
It’s certainly the first thing I thought when I heard about the concept. However, when you think about it, it is just as much of a problem for the Proof of Work model or — let’s be honest — the world as a whole. The rich are able to buy the expensive hardware needed for mining and they are able to open mining centers in countries with low electricity prices. In fact, only a few big mining pools control a big portion of the Bitcoin network.
It might be more difficult to get started in a Proof of Stake model though. I have been doing some small-scale mining with my consumer graphics card recently and it has been profitable after electricity costs. I guess I could have spent the electricity money on some staked coins instead, but it would only be a one-to-one transaction without any profit and it would take a very long time to get enough coins to start staking them this way.
The Proof of Work consensus mechanism used in the Bitcoin blockchain and many others is inherently flawed. The massive amount of electricity needed to guess the correct hash value for the next block is not sustainable in a world on the edge of a climate disaster.
The Proof of Stake method promises to fix some of the problems of Proof of Work. It is energy-efficient, arguably more secure, and more decentralized. While it isn’t without problems of its own, it is undoubtedly the future of cryptocurrencies.
https://medium.com/geekculture/proof-of-stake-vs-proof-of-work-in-cryptocurrencies-f558dbbaec4d