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Blockchain 101 #3: Decoding Consensus: PoW vs. PoS in the Battle of the Blocks

Explores the two primary consensus mechanisms in blockchain: Proof of Work (PoW) and Proof of Stake (PoS), highlighting their differences and use cases.

Blockchain technology has revolutionised the way we transact and interact with digital assets. At the heart of this innovation lies the concept of consensus mechanisms, which ensure the authenticity and integrity of blockchain transactions.

What are Consensus Mechanisms?

A consensus mechanism is a process by which all of the nodes on a blockchain network agree on the state of the ledger. This is essential for ensuring that the blockchain is secure and tamper-proof. Without a consensus mechanism, nodes could disagree on which transactions are valid and which are not, which would lead to chaos and insecurity.

Among the various consensus mechanisms, two primary ones stand out: Proof of Work (PoW) and Proof of Stake (PoS). In this article, we from Blockchain at NTU will delve into the differences and use cases of these consensus mechanisms.

To understand the disparities between PoW and PoS, we first need to grasp their fundamental principles. Proof of Work, as the name suggests, requires participants (aka miners) in a blockchain network to demonstrate their efforts by solving complex mathematical puzzles. This process, commonly known as mining, involves significant computational power and energy consumption. The first participant to solve the puzzle is rewarded with the opportunity to add a new block to the blockchain. The PoW mechanism aims to prevent malicious actors from adding fraudulent blocks to the blockchain, as solving these puzzles is resource-intensive and time-consuming. 

One of the key advantages of PoW is its resilience to attacks. Due to the immense computational power required, it becomes economically unfeasible for a malicious entity to control more than 50% of the computing power in the network. This property, known as the 51% attack resistance, ensures the security and immutability of the blockchain. Bitcoin, the pioneering cryptocurrency, relies on the PoW consensus mechanism, making it the most widely recognized and accepted cryptocurrency to date. 

However, PoW has its drawbacks. The energy consumption associated with mining, especially in the case of Bitcoin, has raised concerns about its environmental impact. Additionally, the need for expensive mining hardware and the increasingly competitive nature of mining have made it inaccessible and less decentralised. 

In contrast, Proof of Stake takes a different approach to consensus. Instead of relying on computational power, PoS assigns the right to create new blocks to participants based on their stake, which typically refers to the number of coins they hold. Therefore, the more coins a participant holds, the greater their chance of being selected to validate and create a new block. 

One of the key advantages of PoS is its energy efficiency. Unlike PoW, PoS does not require participants to solve complex puzzles, resulting in significantly lower energy consumption. This aspect becomes increasingly important as environmental concerns take centre stage in the global discourse. 

Another advantage of PoS is its potential for higher scalability. As PoS does not rely on computational power, it allows for a higher transaction throughput, making it more suitable for networks with a high volume of transactions. Ethereum, the second-largest cryptocurrency, originally following a Proof of Work consensus during Ethereum 1.0, has officially transitioned from PoW to PoS through the development of Ethereum 2.0 in 2022, which led to:

  • Increased energy efficiency: PoS is significantly more energy-efficient than PoW. This is because validators do not need to compete to solve complex mathematical problems in order to validate blocks.

  • Reduced centralisation risk: PoS is more decentralised than PoW because anyone can become a validator by staking ETH. This makes it more difficult for any single party to control the network.

  • Improved scalability: PoS is more scalable than PoW because validators do not need to be as powerful as miners. This means that more people can participate in the network, which helps to improve its scalability.

Despite its advantages, PoS faces criticism from some quarters due to its potential vulnerability to so-called "nothing at stake" and "long-range" attacks. These attacks exploit the absence of computational work and can compromise the security of the blockchain if not appropriately addressed. 

The choice between PoW and PoS ultimately boils down to the nature and requirements of the blockchain network. PoW provides a proven method for ensuring security and immutability, making it ideal for networks with critical applications such as financial transactions. On the other hand, PoS offers energy efficiency and scalability, making it more suitable for networks with a high volume of transactions and a focus on sustainability. 

In conclusion, the battle between PoW and PoS continues to shape the landscape of blockchain technology. Each consensus mechanism has its strengths and weaknesses, and the choice between the two depends on a blockchain network's specific needs and goals. As the technology evolves, it is crucial to strike a balance between security, scalability, energy efficiency, and decentralisation to unlock the full potential of blockchain.

We, from Blockchain at NTU, thank you for being part of this enlightening journey and extend a warm welcome to the enthralling universe of blockchain!

NOTE: Articles written by Blockchain at NTU ARE NOT FINANCIAL ADVICE!

Written By:
Dann Wee
Research Director of Blockchain at NTU Club AY23/24

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