Proof of work vs Proof of stake

In an already wholly digitized world, it seems inevitable that cryptocurrency will soon be used universally. However, development is still required for such a tectonic shift due to the current environmental impact of this technology. On 12th May 2021, Elon Musk, CEO of Tesla, expressed his concerns on Twitter regarding the “rapidly increasing use of fossil fuels for Bitcoin mining and transactions” and stated that the development of cryptocurrencies “cannot come at a great cost to the environment”. The main reason that these networks use so much energy is linked to the nature of the algorithms underpinning them.

Proof of Work (PoW) and Proof of Stake (PoS) are two different algorithms used by a network of participants to decide the transactions added to a cryptocurrency network’s ledger. Bitcoin (BTC) uses the PoW algorithm, which is incredibly energy-intensive. However, recently the Ethereum (ETH) network has launched multiple test platforms for a new project ETH 2.0 implementing the PoS algorithm synonymous with a more environmentally sustainable approach.

The Proof of Work (PoW) algorithm is currently used ubiquitously on the blockchain to validate the minting of new coins. It requires bitcoin miners to solve vast, complicated mathematical puzzles to earn the right to “hash” the next block of bitcoin transactions (to update the ledger which is stored on every computer holding the blockchain). In return for their labour, miners receive the newly minted bitcoins. 

Proof of Stake (PoS) is the alternative consensus algorithm being implemented by Ethereum (ETH). The basis of this idea is that users stake a threshold amount of ETH to become a validator: validators are entered into a random draw where an individual will be chosen to either propose new blocks or ‘attest’ to existing blocks (expressing they view this block as ‘good’ and non-malicious). Validators are rewarded with newly minted ETH for proposing new blocks and ‘attesting’ to non-malicious blocks. Validators attesting to malicious or false blocks simply lose their stake. However, PoS is a relatively new concept, and while it has been implemented on smaller networks it hasn’t yet been tested on the same scale as PoW.

The environmental implications of adoption and continued use of the PoW algorithm by many popular networks such as BTC are simply too significant to ignore. According to Digiconomist’s Bitcoin Energy consumption index, BTC uses 133.68 TWh/year, exceeding Sweden’s consumption of 131.80TWh/year. The sinister side to this statistic is that over 65% of BTC miners are in China where energy is incredibly cheap, often backed by coal and other fossil fuels. E-waste is also an enormous problem with BTC mining because processing speeds rise exponentially and the latest processors used to mine BTC is generally rendered obsolete and uncompetitive after 1-2 years thus must be replaced. Waste produced as a result of this is equivalent to the IT equipment waste of the Netherlands.

One flaw of PoW is that participants who buy more expensive, powerful hardware to mine coins have a distinct advantage of obtaining new coins over those who do not. As a result, we have seen the rise of centralized organizations and syndicates pooling their resources to increase their yield and monopoly of BTC in circulation. Consequently, there are currently just four of these organizations which control over 50% of the world’s BTC. This goes against the fundamental ethos of cryptocurrencies. However, using PoS the strategy of these large organizations is negated – instead, users who stake their coins are rewarded with ETH in proportion to how much they have invested. 

Alternatively, an issue with PoS is that it still aids wealthy miners in becoming wealthier. The more coins you can afford to buy, the more that you can stake and earn. As a result, you can guarantee a much higher return on investment. However, this is hardly a regression because PoW is no different: wealthy BTC miners can purchase arbitrary amounts of additional mining hardware.

The two algorithms can be compared further through the concept of a 51% attack. This is when an individual or organization gains control of more than 51% of the total mining power available. This would allow the individual or organization to make changes to specific blocks, potentially for their gain. This is a particular issue for smaller networks where it is more likely for someone to have more than a 51% share of the currency. For example, in 2019 Bitcoin Cash (BCH) was subject to a 51% attack where two mining organizations and combined to carry out the attack, stopping an unknown miner from taking coins he was not supposed to have access to. Although this attack was used for good, it is useful in highlighting the power these organizations have over networks.

However, using PoS the prospect of a 51% attack is somewhat trivial. The only way a user could have 51% of the coins in circulation would be to purchase the coins from the open markets. Buying such a large share of the coins in circulation naturally increases the price hence by the time the user buys more than 51% of the coins they would have spent significantly more than they could expect to gain from the attack. Furthermore, once the network had realized the malicious intent of the user, they would lose all their stakes.

PoW and PoS are both mechanisms that solve the problem of achieving consensus on which transactions are added to a blockchain without the need for a central authority. PoW has the advantage of making it incredibly expensive to attack the network but comes at an increasing environmental cost. PoS has the advantage of avoiding such energy costs but on the contrary, is newer and has more uncertainty surrounding it. It certainly appears that PoS poses the solution to PoW’s sustainability issues but only time will tell whether we will see PoS be used globally. 

By: Owen Dawber 

Sector Head: Sophia Li