When it comes to discussing blockchain and its associated algorithms, there are two primary types: Proof-of-Work (PoW) and Proof-of-Stake (PoS). Until today PoW is the most common algorithm used by blockchain networks. Ethereum, one of the most influential blockchain projects, will announce its “END GAME” on September 15 with the release of The Merge which changes its algorithm from PoW to PoS.
PoW is a system of distributed consensus that relies on computing power. This is done to prove that someone has put in the required amount of work to create a valid block. The goal is to create a system in which a person’s computing power is proportional to their influence on the network.
PoW algorithms are used in most blockchains such as Bitcoin, Ethereum, and Litecoin. These algorithms create a trustless system, where all people on the network can trust the system and nobody has to trust one person or one organization. Today, we discuss some of the main benefits of switching from PoW to PoS.
Distributed consensus through staking
One of the key advantages of PoS is that it uses the concept of staking. Staking means you’re locking up your tokens for a certain period of time, much like depositing money in a savings account. The more tokens you stake, the more influence you have over the network. PoS creates distributed consensus by allowing users to bet on the outcome of a transaction, much like betting on the outcome of a sports game.
If you bet correctly (i.e. according to the outcome of the network), you earn a reward. If you bet incorrectly, you lose your stake. PoS algorithms work best in networks where most of the participants are token holders. In this case, the network is self-sustaining: if someone tries to act maliciously, the other nodes will simply vote them off the network.
Faster transaction times
PoS blockchains have less of a gap between blocks than PoW blockchains do. In PoW, the time between blocks is unpredictable, but in PoS, the block time is fixed. PoS blockchains can have block times as low as a few seconds, making them much faster than PoW blockchains, which can take 10 minutes or more. PoS blockchains are particularly beneficial for applications that require low transaction latency. Some examples include decentralised exchange (DX) markets, decentralised gaming applications, decentralised communication apps, and others.
No need for hardware mining infrastructure
One of the biggest reasons why PoS blockchains are preferred over PoW systems is the absence of hardware mining infrastructure. PoW systems require expensive ASIC machines to contribute to the consensus process. The cost of these machines is passed onto the network, making it expensive to transact with the blockchain. But PoS is a trustless, distributed consensus algorithm that doesn’t require costly hardware. It’s more like a lottery, where the more tokens you stake, the higher your chances of winning. PoS blockchains can be designed in such a way that the cost of transacting with them is as low as possible.
No leakage of mining waste
PoW requires a lot of energy and generates a huge amount of heat. For example, Bitcoin mining consumes enough energy to power nearly 2 million US homes, as per Digiconomist. PoS doesn’t require this kind of resource-intensive activity. Instead, it uses statistical probability to reward people who do work for the network. It doesn’t waste energy or create extra heat, so it is much more environmentally friendly than PoW. Further, PoS can also be designed in such a way that it is distributed among as many people as possible. This makes it less likely to centralize than PoW.
