Proof of Work VS Proof of Stake

You want to send someone 100 dollars. While you click a few buttons and away your transaction goes, behind the scenes there is a detailed orchestra that allows that to happen. In the world of digital assets this is called a proof and is the most fundamental mechanism in all blockchain systems. It is a way to publicly prove that your transactions will be added to the ledger.

Before blockchain you had to rely on two parties, your bank and the recipient’s bank, to give your hundred dollars to the intended person. Since this takes manpower and time, 3rd parties charge you fees. This is increasingly becoming more expensive as bank fees have risen exponentially over the last two decades.

How do we change this for the better?

Proof of Work

The hundred dollars you sent now is pooled with other transactions into an open block. These blocks or group of transactions cannot be proven without someone doing work such as mining or voting consensus. This can happen through multiple ways, but proof of work was the original system that gave Bitcoin its’ ability to remove 3rd party providers from traditional finance.

This system uses energy as people are competing to solve the “work”. This work uses a computer to solve a mathematical equation and upon completion you receive the rewards and fees associated. The system is extremely hard to change or manipulate due to the competition between the miners. This prevents double spending and is the reason there has never been a manipulation since blockchain’s inception in 2010. The biggest issue of this first proof system is the energy requirements. It is inefficient and uses the equivalent energy of Chile to keep it operating. This consensus model was the first and as with all of civilization we build on our previous advancements.

Proof of Stake

Born from the need to reduce this wasted energy, proof of stake models were created. This mechanism still solves blocks of transactions, but instead of doing “work” all validators vote on the transactions. These voters take their cryptocurrency and lock them in a contract to provide an interest in the system. So that 100 dollars you sent is now voted on by millions of validators.

Economic finality is accomplished in PoS by requiring validators to submit deposits to participate, and taking away their deposits if the protocol determines that they acted in some way that violates some set of rules (‘slashing conditions’). This mechanism disincentivizes exploits as you will be fined against your initial deposit for not following these conditions.

Another security measure is your voting power is determined by the percentage of the total asset that you own. An extremely large holder owning 3% of supply can only be rewarded 3% of the voting power, which reduces the potential for bad actors and becomes extremely costly if you are trying to manipulate the system. This proof allows for less cost and also more decentralization since the barriers for staking are much lower.

With proof of work you had to purchase costly computers and at times run them at a loss since electricity is expensive, but with proof of stake you just have to own the associated cryptocurrency and allow it to be used for voting. This leads to 96% reduction in energy costs with minimal loss of security and allows more transactions in a given time frame.

Progress is Always Forward

These systems are always evolving and will inevitably lead to more efficient and robust systems over time. Ethereum is in the process of converting their proof of work chain to proof of stake and with it comes a lot of safety checks so that no vulnerabilities can be exploited. These systems need to evolve to the rapidly changing landscape or become fossils. We are still in the infancy of these technologies and with it comes growing pains, but the future looks bright.

-Dr. Austin Fortner