Which Transaction Validation Form Is the Best?
Here it is:
The head to head
The definitive answer
The champion of champions
Except... no, no it’s not. There’s a bit too much of that kind of rigid thinking these days, and we certainly don’t want to ram our opinions down anyone's throat.
So, instead of pushing an agenda one way or the other, we think treating our readers with a bit more respect is the right way to go. This means presenting the facts and nothing else, and giving you what you need to make up your own mind about what is really the best way to validate a transaction on a payment network – the Proof of Stake method, or Proof of Work?
Let’s start by examining exactly what these terms actually mean.
What Is the Point of the Proof of Work and Proof of Stake Methods?
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Both Proof of Work and Proof of Stake are moving towards the same ends.
Both are designed to validate or verify transactions before they are written into the permanent record. This permanent record is usually the blockchain, but it may be another form of transaction record.
However, while both of these methods are performing the same function, they do so in wildly different ways. We’ve briefly looked into this before, but you need much, much more detail if you are to truly get to grips with the possibilities and the diversity of cryptocurrency.
So, let’s start with the one we’ve already met: Proof of Work.
What Is Proof of Work Validation?
This one may already be familiar to you. This is because it is used by the Big Daddy of cryptocurrency networks – Bitcoin. We have touched on this a bit in past articles, but now we’re going to examine this more closely.
The PoW system is based upon the process of mining. When a transaction is completed, it is batched together with other transactions and written into a block to be added to the blockchain.
This batching and writing is carried out by nodes – computing devices owned by users that are set up to complete these tasks for the network. When the process is complete, a hash value is attributed to the new block and a copy of the updated blockchain is stored across all the user nodes in the network.
In order to write the block into the blockchain, the user node must be the first to solve a complex mathematical puzzle. When the puzzle is solved, the blockchain is updated and a percentage reward is delivered to the user in the network’s currency.
It’s a neat, tidy, and self-sustaining way to validate transactions. But it is not the only way. Not by any stretch of the imagination.
What Is the Proof of Stake Method?
So far, so good. Now for something a little different: Proof of Stake, or PoS.
PoS does away with the concept of “miners”. Instead, this method uses “validators”. Bear in mind that the word “validators” is a general term and that different networks that use this method may have their own terms for these actors.
So, what’s the difference between a miner and a validator?
Well, while miners in a PoW set-up work to solve cryptographic puzzles, validators instead verify the transactions that are then recorded. In order to gain the right to do this, the validator must put up some of their own cryptocurrency funds as collateral.
This collateral becomes their “stake” in the transaction, hence, Proof of Stake.
Of course, just like with any other kind of collateral, different stakes may be worth more or less than each other. If you were required to put down a deposit of 20% to secure the purchase of a property, you wouldn’t expect to be able to achieve the same with a deposit of only 17%, would you?
This is why users who are willing to stake more currency tokens earn the right to verify more transactions, and therefore, earn more of the rewards.
The selection process is still random, but those with larger stakes are more likely to be selected – just the same as, if you buy 10% of the tickets at the town hall raffle, you are more likely to win that giant cuddly teddy bear than if you only bought 8% of the tickets.
In basic terms:
In a PoW system, it is the node with the most computing power available at that time that gets to mine the block and gain the reward.
In a PoS system, it is the user who is willing to stake the most currency tokens who is permitted to validate the transaction and receive a fee for completing the transaction.
What Is a Hybrid Model?
Before we continue, we should mention that PoS and PoW systems are not always mutually exclusive. It is possible to have the best of both worlds.
One example of a currency that uses both types of validation to some extent is Dash. The Dash network features masternodes – i.e. nodes with a status greater than that of a normal node. These nodes still perform mining functions in the same way that a normal node on the Bitcoin network might, but the node user must put down a stake in order to attain masternode status.
There are other ways in which the two methods can be combined. This is just one example. We just wanted to introduce this hybrid approach to demonstrate that the cryptocurrency landscape is not divided into two distinct camps.
We’ll be looking at this again later on. For now, however, back to PoS vs PoW.
The Validation Battleground: What Are the Key Areas of Conflict Between PoS and PoW?
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Speed is one of the most crucial metrics in the tech world. We expect to be able to complete transactions quickly and without fuss. If we cannot do this, the potential of our payment networks is limited.
Proof of Work vs Proof of Stake: Speed
Proof of Stake is often touted as being considerably faster and more efficient than Proof of Work, offering users speedier transactions. However, this is something of a myth.
The myth itself is born out of the fact that the Bitcoin network takes a seriously long time to process a transaction, often up to 10 minutes. In our speed-obsessed modern age, taking 10 minutes to do something as simple as validating a transaction is almost unforgivable.
But this is Bitcoin. This is not Proof of Work. Sure, the Bitcoin network uses the PoW method of validation, but so does Ethereum, and Ethereum processes transactions in only 16 seconds.
Proof of Stake can go faster than this, but Proof of Work is not really the slowcoach it is often made out to be.
The idea of cryptocurrency is that it will evolve and grow, eventually standing side by side with fiat currency networks as a viable alternative. This means the network must be scalable – i.e. it must be able to keep functioning at its best, even as user volumes increase.
Proof of Work vs Proof of Stake: Scalability
Scalability – or lack of it – is a major criticism that has been leveled at the Bitcoin network. The structure of Bitcoin does not lend itself to handling increased transaction volumes as it grows. This could make the network increasingly inefficient as more and more users are added.
But is this the fault of Proof of Work? The answer to this is... maybe.
Ethereum also uses Proof of Work, as mentioned, and is experiencing similar struggles when it comes to increasing its transaction and user volumes. Contrast this with Proof of Stake-based currencies such as NEO, which seem to be going from strength to strength in terms of efficiency, and we can see how PoS may offer an advantage.
It is worth noting that Ethereum expects to be able to process thousands of transactions a second when it rolls out PoS validation. With its current PoW set-up, it is achieving about 15.
It might seem strange to talk about energy and other environmental concerns. After all, these networks are wholly digital, aren’t they? So there’s no carbon footprint?
Well, no. Not really.
The networks still need hardware to run. This hardware needs energy, and this energy needs to be produced somehow. This makes environmental concerns very real indeed.
Proof of Work vs Proof of Stake: Energy
If you own a mining node on the Bitcoin network, your mining node is always on. It is not “always on standby”, or “always on in sleep mode”, it is – quite literally – always on. Always working, always solving equations, always engaged. When a new block needs to be mined, all of the network's active nodes are rallied, and they all get to work. The amount of electricity this draws upon is vast.
There is really no way around this with the PoW model. It is a race, and the first node to complete the task wins – this means that all nodes must be included.
For a PoS validation, the winning validator is selected in the “lottery” process. Only the randomly selected winner needs to use any power to validate the transaction. Energy consumption is reduced.
One of the key tenets of cryptocurrency is that it is decentralized. It is not controlled by any one party, any one corporation, any one group, or any one locality. If this ceases to be the case, we have a problem.
Proof of Work vs Proof of Stake: Centralization/Decentralization
On the face of it, Proof of Work would seem to be the better option here – a wholly egalitarian system in which the node that completes the calculation wins the reward.
Proof of Stake, on the other hand, smacks of plutocracy – where only those who can afford to invest large sums get the rewards.
But, in effect, the truth may be different. With PoW, it is possible to join forces with other users to create mining pools. These are pools of nodes with vast computing resources, located in one centralized location – China, in the case of Bitcoin’s mining pools – which bully other users out of transaction rewards.
Sure, in a PoS system, the user needs to buy their stake and then put it up as collateral, but the randomized selection process means that users cannot join forces to improve their chances of receiving the reward.
So groups cannot band together, but where does this leave the individual user? Well, to be honest – in a Proof of Stake system – they are still at a disadvantage. Such users still need to invest vast amounts in cryptocurrency, which they must then freeze to put up as a stake. Do most users have this sort of available currency to invest? No, no they do not.
Beyond the question of centralization and decentralization, there is another concern when it comes to network neutrality and security – the threat of a 51% attack.
If an entity is able to gain over 50% of the validation power of a network, they are in the driver’s seat – they can make any changes they want to, and this power can be used for nefarious purposes.
Proof of Work vs Proof of Stake: Network Control
We’ve already mentioned how groups create mining pools to boost their chances when block mining. What if this group continued buying up nodes until they owned over half of them? This could happen, and – in fact – it has happened in the past.
This would be more difficult with Proof of Stake, as the only way to gain more control would be to purchase more of the currency. This, in turn, would drive the value up and result in a whole lot of expense with not much gain at the end of the tunnel.
However, one weakness of the PoS system is the potential for double spend. It would be possible for a skilled hacker to work multiple transaction chains at the same time, tricking the network into allowing currency units to be spent twice.
PoW and PoS: The Hybrid Option
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We’ve looked at the evidence and... well, we’ve looked at the evidence. We can’t pick a winner, because the definition of “winner” depends on so many factors.
If the independent, decentralized ethos of cryptocurrency is everything to you, you might choose a very different winner than someone who prizes efficiency and speed above all else.
But, as we have seen, the real answer may not be black and white.
There is a third way – the hybrid option – bringing together both PoS and PoW to create meaningful results for cryptocurrencies, and for their users.
Now is not the time to be militant and partisan. Now is the time to be practical and smart. Is PoW really the hill you want to die on? How about PoS? No, of course not. Instead, we can expect a more nuanced approach, as network developers craft better results using elements of both validation systems.
Don't forget that the whole concept of crypto is still evolving. No one truly knows what's coming next, but it's sure to be exciting.