Proof of Stake vs Proof of Work, the battle for DeFi Supremacy
The Battle Supremacy in Decentralized finance has always been talked about with the comparison between Bitcoin and Ethereum. Sure enough they are currently the two largest Cryptocurrencies controlling about 50–60% of the market share. As the market share for cryptocurrencies keeps on increasing, supremacy also lies in which cryptocurrency have the sustainable technology to cater to the increasing challenges and demand. The story of Cryptocurrency may begin using the Proof of Work System with Bitcoin but some may argue that Proof of Stake could be a solution for the future of DeFi. So What is Proof of Stake and Proof of Work? And Which is the Sustainable Solution going ahead?
Proof of Stake vs Proof of Work
Essentially when Satoshi Nakamoto was building the first-ever cryptocurrency, Bitcoin, he needed to find a way for the transactions inside the blockchain system to be verified correctly without the involvement of a third party. This was then achieved with the introduction of the proof of work system.
Proof of work is currently the most popular consensus algorithm for blockchain applications. The proof of work system consisted of a series of cryptographic puzzles for a computer to solve in order to create a new block. These puzzles are known as cryptographic hash functions, and they’re only solvable using guess-and-check, even for computers. The computers attempting to solve the puzzle must check trillions of wrong answers before they find a correct answer. Even with thousands of computers working on the same problem, it still takes ten minutes on average for one computer to find a correct answer. As soon as a computer finds a correct answer and the network accepts it, the computer that solves the problem will verify and update the transactions to the blockchain network.
Now you might be wondering why would somebody wants to buy a lot of hardware and consume lots of electricity just to help confirm Bitcoin transactions? Well, the simple answer is that people are rewarded with additional Bitcoin and transaction fees (or whichever cryptocurrency Proof of Work is confirming) for their efforts in maintaining the network. Although Proof of Work is an amazing invention to begin with, it is anything but perfect going ahead as the adoption of Bitcoin grows in scale.
The challenge of the growing Blockchain Network is scalability and cost. The more transactions and nodes you add to a network, the more difficult it is to fit all those transactions in a block and establish consensus across the global network. Since there’s no governing body or central institution in a blockchain, the ledger only gets updated when the entire network agrees.
In the face of this growth and change, many are starting to question the foundations of proof of work consensus as laid out by Satoshi Nakamoto in the Bitcoin white paper. Not only does it use a lot of electricity, but it also concentrates mining power and rewards the institutions that are willing to invest millions of dollars in mining equipment and electricity. All this finally results in high transaction fees for Bitcoin as the Network is keen to focus their resources on transactions that yield higher fees to cover their cost.
This Proof of Work Mechanism has recently drawn a lot of criticism from environmentally concerned parties which caused the market to drop in mid of 2021. This is where Proof of Stake has recently been viewed as a more sustainable solution although it is still in its early stage.
In the interest of saving energy and creating a more sustainable solution in the future. Proof of stake shifted the investment from hitech computer and electricity and shifted the focus to the token itself. The Proof of Stake Participants must put their coins into a specific wallet. This wallet then freezes the coins, meaning that they are being used to stake the network and the network will then randomly select the nodes based on the amount they stake on the network to then have the opportunity to validate and update the transaction to the blockchain network.
If the block builder creates a fair, valid block, then they will receive a reward which is the transaction fees and if the block builder is dishonest and approved a bad transaction on the network, they will lose their collateral, restricting their ability to participate in future rounds of PoS. This could then eliminate the huge waste of energy resulted in the nodes competing against each other in Proof of Work which will further speed up the transaction process and reduce the fees associated, as the nodes who staked their collateral would then want their collateral back and they could only get it by validating the transactions.
Proof of stake as you can see is also an imperfect system and the first concern when discussing the sustainability of Proof of Stake is the issue that some people have about it helping the rich get richer. This is because the more coins you can afford to buy, the more coins you can stake and earn.
Think of it like this. If you have enough money to meet the minimum staking requirement (which most people don’t) then you can guarantee yourself a very good return on your investment. Those who have the most money will always have the best chance of winning the reward, making the rich richer.
However, this is almost no different from the Proof of Work consensus mechanism, whereby wealthy miners can simply purchase thousands of ASIC devices.
The second concern that some people have about Proof of Stake is that it allows people to verify transactions on multiple chains, which Proof of Work doesn’t. The reason this could be an issue is that it might allow a hacker to perform a double-spend attack.
This is when somebody transfers funds to somebody else, but before the transaction is confirmed, they manage to spend the funds again. Under normal circumstances, such an attempt would be prevented when all of the other miners on the network see it. Furthermore, because Proof of Work only allows devices to mine on one chain, the dishonest chain would simply be rejected.
On the other hand, in a Proof of Stake model, it doesn’t cost forgers any money to mine on multiple chains, possibly allowing somebody to successfully perform a double-spend. Which is otherwise known as the ‘nothing at stake’ problem?
The Sustainable solution
As the search for the most sustainable solution goes on, many in the crypto community have begun to advocate for hybrid consensus. One common proposal is securing one in every ten blocks using proof of work while the other nine use proof of stake. This brings the tested security benefits of proof of work alongside the energy and punishment controls of proof of stake. It also means that two distinct pools of users (miners and stakers) would verify blocks, making it more difficult to coordinate an attack.
Of course, such a shift would drastically undercut the profits miners currently enjoy. The switch is further complicated when you consider that any change to a blockchain network requires miners to update the software version themselves. If a majority of miners decide it’s against their interests to switch to proof of stake, then the change won’t go through or a hard fork of the blockchain is necessary.
The fight between proof of work and proof of stake is of vital importance as the one with the better technology could be holding the supremacy going forward. Proof of stake is currently a better solution for energy efficiency and sustainability. However, considering that most of the crypto market begins with proof of work, it still remains a well and proven method to validate transactions in the blockchain networks. Let us know your thoughts on this battle between Proof of Work and Proof of Stake?
We in Nagaya Technologies have developed the world’s first hybrid cryptocurrency using the Proof of Work mechanism. Due to the huge Environmental concerns surrounding Mining Activities in Proof of Work, our Nagaya coins are pre — mined so we can help to not only provide value to all our holders but also the environment. To know more and receive the latest updates about Nagaya, you can visit us at nagaya.io
Or you can talk to us at t.me/nagayaofficial