Proof of Work vs Proof of Stake: Why Proof of Stake Hasn't Killed Proof of Work...Yet

How does the internet agree on anything? Our world is more interconnected than ever, making it ripe for mistrust and conflict. But somehow, we make it work. Just like how the United Nations was founded on agreements called treaties, the internet is also composed of agreements called protocols. These protocols are the foundation of the web we know today. 

Proof of stake and proof of work are protocols intended to keep cryptocurrencies secure and decentralized, but is one better than the other? In order to compare proof of work vs proof of stake, we must first identify the key differences between them. While proof of work is older and more established, support for proof of stake adoption is growing and many believe it will soon become the dominant way to secure a blockchain. So why is the distinction between proof of stake vs proof of work important? And why do we need proof of anything in the first place?

Protocols make it possible for anyone to use the internet. The hypertext transfer protocol (HTTP) and domain naming system (DNS) are just a couple of conventions we all adhere to online every day. Similarly, blockchains are also networks governed by rules called protocols. Since blockchains have no central authority, things like proof of stake (PoS) and proof of work (PoW) are necessary to prevent fraud, denial of service attacks, and other bad-faith behaviors. 

Because blockchains are decentralized, the network must agree on a universal protocol for ensuring security. Each blockchain has its own protocol—also known as a consensus mechanism—for securely validating transactions. Proof of work is the most secure and reliable mechanism for validating transactions. This is the one used by Bitcoin, Litecoin, and, currently, Ethereum.

The 'work' in proof of work refers to the computational power expended to validate transactions. This work entails producing a cryptographic hash that represents all recent transactions on the network. A hash is a unique string of characters that is produced and permanently added to the blockchain by a pool of computers—known as 'miners'—in exchange for newly minted tokens. This is how Bitcoin mining works.

The main benefit of the proof of work mechanism is its security. Some may think it's cryptography that makes Bitcoin secure, but it's actually the work. Specifically, it's the resources, like electricity and computing power, required to do the work. Because any given set of data will only generate one hash, the only way to successfully tamper with a proof of work ledger is by controlling over half its computing power. It's this computational requirement that makes validating a fraudulent transaction too impractical to reasonably achieve in a proof of work environment.

While having more miners on the network makes it harder to hack, Bitcoin is also designed to get progressively harder to mine. You could once mine Bitcoin using almost any old computer, but the gradually increasing difficulty has brought the barrier of entry up along with it. Bitcoin mining has become so competitive that it's now hard to do with anything other than specialized hardware.

Making Bitcoin mining harder isn't exactly aligned with the philosophy of decentralization, resulting in the need for prohibitively expensive Bitcoin super-miners. Also, Bitcoin contends with increased energy consumption as the network grows, yet, its inability to scale means that the rate at which transactions are processed—known as throughput—remains almost stagnant. These drawbacks are some of the symptoms of a proof of work framework.

One solution to this has been abandoning proof of work in favor of different protocols on which the basis of new blockchains can be built. One popular alternative is proof of stake, and it's taken the crypto world by storm as the go-to model for creating trustless networks. So, how does proof of stake work?

Proof of stake shares the same principles and goals of proof of work: a protocol for validating transactions without a central authority. The big change with proof of stake is that it replaces miners with token holders known as 'validators.' Rather than enforcing a hardware requirement for participating in the network, this framework sets an economic requirement to 'stake' a minimum number of tokens.

Staking is the only requirement for turning a computer into a proof of stake validator node, so specialized equipment isn't necessary to participate. Staking usually involves locking tokens, meaning withdrawals are restricted for a period of time, in exchange for becoming a validator and earning rewards—with the top crypto staking coins being the most lucative. A stake can also serve as collateral for the validator who can lose their staked tokens if they don't fulfill their duties.

One way proof of stake is less competitive than proof of work is by including delegators. Since the minimum token requirement for becoming a validator is often too high for most people to afford, many proof of stake protocols allow individuals to delegate their tokens to a validator in exchange for receiving part of their rewards. The role of delegator allows for broader participation beyond just those who can afford to be a validator.

Proponents of proof of stake also believe it's the best way to address the high electricity consumption that proof of work is often criticized for. While it's generally true that running a proof of stake validator is less resource-intensive than a proof of work miner, active validators are still consuming electricity 24/7. Although proof of stake makes blockchains more energy sustainable, there are some ways in which proof of stake is fundamentally flawed.

Every consensus mechanism must strike a balance between security and efficiency. On one hand, proof of work blockchains require tons of computing power to operate, which makes them extremely secure but highly inefficient. On the other hand, proof of stake requires fewer physical resources, like energy and computing power, but it also has inherent vulnerabilities that may compromise security.

As flawed as the proof of stake mechanism is, it hasn't been an obstacle to the widespread popularity of proof of stake cryptos like Cardano and Solana. Proof of stake is so ubiquitous now that it has given rise to modular proof-of-stake architectures such as Tendermint. Tendermint is an open-source consensus protocol that is byzantine fault tolerant, which means the blockchain will still work even if one validator fails or misbehaves. Some popular protocols that have adopted some form of the Tendermint consensus include Cosmos, Terra, Polygon, and Binance Smart Chain. 

Tendermint is an example of how, with the right solutions to the fundamental issues, proof of stake can overtake proof of work as the standard way to secure a blockchain. Meanwhile, Ethereum co-founder Vitalik Buterin is advocating for a slightly different approach. Last year, he co-authored a paper detailing how a hybrid model called Casper works and why it could be a good compromise. Ethereum is currently leading the charge toward proof of stake, with plans to upgrade the network slated for sometime this year. 

Although the idea is still in its infancy, a hybrid model could make sense. If implemented correctly, Casper could offer the best of both worlds—the security of proof of work with the efficiency of proof of stake. Hardware-mined altcoins are falling out of vogue, so newcomers and veterans alike see only the benefits of embracing new blockchain protocols. Although the alternative isn't so eco-friendly, the verdict is still out on whether there's a secure future for proof of stake.