An Introduction to Proof of Work (PoW) vs Proof of Stake (PoS)

Jonathan Speigner

Bitcoin’s energy demands have never failed to spark long running debates. Some people believe that the benefits of Bitcoin significantly outweigh the drawbacks. In fact, some actually argue that Bitcoin incentivises the advancement of cleaner, renewable energy. But the fact of the matter is that extensive energy consumption is never ideal and when there are clear ways to improve energy efficiency, we should always aim to do so.

The reason that Bitcoin has extreme energy consumption is because of the consensus mechanism that it uses. With blockchains, consensus mechanisms are ways that network operators reach agreements on which transactions are valid. Essentially, consensus mechanisms are different ways to agree on what is true and what is false. Once a “consensus” has been reached, transactions can then be successfully added to a blockchain.

Bitcoin uses the Proof of Work consensus mechanism. It was created by Bitcoin’s creator himself, Satoshi Nakamoto, and it’s based on an advanced form of mathematics where network operators have to solve complex mathematical problems that are so difficult only powerful computers can solve them. It’s these computers that require such a vast amount of power and to make things worse, because these computers have almost no downtime, energy consumption becomes ridiculously high. Because of this, other consensus mechanisms were created, with the most popular being Proof of Stake (PoS).

PoS differs from PoW because network operators validate block transactions according to how many coins are in their possession rather than the sheer amount of computing power that they possess. What makes PoS better than PoW, apart from the significant energy benefits, is that the mining system is much more equal, as there’s no requirements for extensive hardware requirements, which not only makes the mining process fairer but it also makes it more decentralized.

Ethereum, the second largest cryptocurrency by market capitalization, is in the process of migrating from PoW to PoS. This change is part of the wider Ethereum 2.0 upgrade that’s currently being implemented. The reason that Ethereum is making this change is because the developers and the wider community are worried about the impact of PoW and they want to moveto a cleaner and greener version of consensus. As we become more conscious of our carbon footprint, it’s important that organisations all around the world pull their weight otherwise they risk coming under scrutiny. But it isn’t only for environmental reasons.

The overall Ethereum 2.0 upgrade is primarily focused on improving the scalability of the Ethereum network, which is notorious for ludericus network transaction costs and settlement times. Now that Ethereum has serious competitors like Avalanche, Cardano and Solana, they need to make significant changes to their original technology if they don’t want to be viewed as an outdated technology.

Final Thoughts

Thanks to PoS, blockchain validators are no longer required to use computing power to maintain the network. This provides multiple benefits including, energy savings, better energy efficiency and safer networks. Operating with a PoS consensus also helps with decentralization because it lowers the barrier for entry to become a network operator.

PoW was definitely a great innovation. It helped bring about one of the most important monetary inventions of all time. However in the modern day, PoW based networks simply cannot compete with faster, more decentralized and more energy efficient PoS based networks. It’s simply technological evolution.