Jaiya Gill

Proof of Work vs. Proof of Stake

There's been a lot of talk around the $ETH Merge, transitioning ETH from 'Proof of Work' and heading towards the more secure & eco-friendly 'Proof of Stake' model. Let's break it down.

Proof of Work and Proof of Stake are both algorithms, also known as consensus mechanisms, that help blockchains with security and data organization. These algorithms determine which node (computer) in the network can add the next block of transactions to the chain.

Proof of Work

In Proof of Work, there are continuous competitions to a simple problem that can only be solved by guessing tons of numbers, which is secured and verified by virtual miners.

This is like thousands of tennis players trying to win against Serena Williams when there’s no second place or participation trophy. These winners are more likely to continue winning because they have more powerful computers.

BUT there’s also some luck involved. Everyone has a (low) chance. With this chance, while unlikely, a relatively less powerful computer could still win the tournament. With PoW, miners use computational power to win the tournament. The reason it’s called “Proof of Work” is because the network requires large amounts of processing power.

They work really hard so that it’s difficult for others to fake that hard work and make fraudulent blocks. Winners get rewarded in $ETH and get to update the blockchain with the latest verified transactions. The more powerful computers you have, the more likely you are to win that block.

Proof of Stake

In Proof of Stake, all the tennis players who successfully enter the tournament are rewarded for playing. To enter successfully, the players need to lock in a deposit which is called staking. This means that the Proof of Stake blockchains employ a network of validators to buy and hold their own crypto to be chosen to form a block and earn rewards.

If you stake in 32 ETH, you can be picked to build a block. If you try to misuse it, the stake can be taken away, incentivizing trust and reliability. The more ETH staked, the more likely (but not guaranteed) you are to be chosen to create new blocks by the algorithm. All participants receive a reward in proportion to each one’s stake.

PoW vs. PoS

One key difference of Proof of Work and Proof of Stake systems is how they reward participants.In PoW, a reward is given to the first miner who solves each block's problem. In PoS, the protocol assigns a validator to each block, instead of fighting who gets the reward first, making the process more orderly. Validators must stay reliable and benevolent to avoid losing coins. Every PoS model has different factors to pick validators to validate the block. This includes how many coins they’ve staked, how long they’ve been staking, and some combination of factors too.

Similar to PoW, Proof of Stake avoids cheating or fraud, like taking free coins or faking transactions. These can be fact-checked by anyone, and when proven wrong, that validator’s stake is removed. In PoS, the validator’s staked coins are an economic incentive to act in the network’s best interests. If they accept a bad block, a portion of their staked coins will be “slashed” as a penalty. In PoW, the penalty for miners submitting invalid information, or blocks, is the sunk cost of time, energy, and computing power.

Why do we care about Proof of Stake? Ethereum is moving from a PoW to a PoS model. This will lower barriers of entry and the amount of energy wasted. Miners no longer need supercomputers to mine $ETH.

In the PoW model, miners must purchase mining equipment and keep it running indefinitely. The PoS validators only have the upfront cost of purchasing coins to participate. The time it takes for the PoS model to choose a winning validator is also significantly quicker than the PoW competition, allowing for increased transaction speeds.

In practice, what does this mean for Ethereum? Remember the 3 S's:
Sustainability: less power required
Security: decentralized and low barriers to entry
Scalability: PoS will enable scalability improvements down the line

TL;DR

The Blockchain is a decentralized system using mechanisms to come to an agreement on things. Proof of Work relies on computing power, requiring more energy. Proof of Stake depends on the user staking their own coins to validate transactions.