Proof-of-Stake vs Proof-of-Work: Is PoS better than PoW?

It has been over a year since Ethereum’s major upgrade in September 2022, which saw it transition from the Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS).

The move happened without visible hitches – at least to the majority of observers – and Ethereum continues to work in a stable manner, with the ability to handle many more transactions than was previously possible en route (sharding and PoS claims to be able to bring Ethereum’s capacity to handle 100,000 transactions per second or TPS as opposed to 30 TPS pre-Merge).

After the September 2022 event, the reduction of Ether (ETH) issuance and the fact that users and nodes in Ethereum didn’t appear to flee the network,  was seen by some as vindication of the perceived advantages of the Merge.

In an accompanying article, we discussed the merits of the PoW consensus mechanism, through the eyes of Bitcoin as its first and main representative, against the PoS alternative, of which Ethereum is now the major example. 

In this article, we examine Ethereum and PoS’s side of the argument, to understand why proponents of PoS and the Merge believe it is a better alternative to PoW.

Before we head in, a useful summary of what PoS is: a method of decentralised consensus based not on computational power (or work) but on the amount of crypto held (or staked).

Unlike PoW, where miners compete to solve complex mathematical puzzles to validate transactions, PoS requires that validators hold a certain amount of cryptocurrency in a digital wallet to participate in the validation process. 

Think of the stake as collateral in a game. For each round (or block), a lottery is held to decide who gets the rewards for the new blocks. The bigger your stake, the more tickets you have in the lottery, so the likelier you are to win it.

One of the biggest criticisms of PoW, and of cryptocurrency in general, is the consumption of energy and what effect this has on our planet. Climate activists are demanding change to what they consider a waste of energy and unnecessary damage caused to our planet due to energy usage in crypto.

PoS is considered to be much more energy-efficient compared to PoW, as it does not require the same level of computational power. Instead of highly-specialised computers required by PoW miners, regular devices and even smartphones are often enough to run a validator.

Because validators are chosen to validate transactions based on their stake in the network, they don’t need to compete with ever-higher demands of computational power for mining rewards. This resulting in significantly lower energy consumption.

PoS in Ethereum is said to use only a fraction of the energy that is needed for Bitcoin’s PoW.

In terms of speed, confirmations of transactions on the PoS network are in general much faster than transactions made with PoW. 

In PoS, blocks are decided when validators are chosen to nominate blocks, so they don’t have to wait very long, unlike PoW, where miners must actually solve complex puzzles to create new blocks.

With PoW, on the Bitcoin network, a transaction receives a confirmation every 10 minutes, on average. With PoS, on the Ethereum network, a transaction receives a confirmation every 12 seconds. This is because, in Ethereum, every block is determined with a slot of 12-second units.

PoS also paves the way for newer technologies for scalability – the term used in crypto a lot to mean how large the network can grow in terms of capacity for handling transactions. While Layer 2 solutions are popular for Ethereum, allowing for off-chain capacities,  it has also planned to implement something called sharding.

In this manner, the network would divide itself into smaller “shards”, each containing its own accounts, smart contracts, and transactions, processing and storing transactions as they occur on each shard, instead of on the entire network.

This is thought to increase TPS to as much as 100,000.

For the currently visible and quantifiable aspects – energy consumption and transactional capacity being the most obvious – PoS does appear to be a great solution for cryptocurrency.

It doesn’t cost as much, and it’s quicker.

The point of contention really is the security – which model is going to be better at protecting the network against attacks?

PoW presents the “too expensive to succeed” argument so well because the only way to defeat a network like Bitcoin is to put in more work than the honest actors – a feat too costly to realistically consider.

PoS would appear to be weaker in this way, but Ethereum and others believe that detecting and punishing bad actors is actually easier with PoS, as it’s far easier (because of cost) to reorganise after an attack.

Decentralisation, which is a tenet of conservative blockchain, is another factor where PoW and PoS proponents disagree on.

PoW does mean an objective view of which is the correct chain in a blockchain, while PoS is subjective – it relies on a group of trusted validators to agree on an action. In this sense, many argue that the group of validators on PoS is highly centralised as they are, in effect, a cartel.

But the same argument also goes for Bitcoin’s PoW, where large mining pools control huge portions of the contributing computing power.

In the end, for the average consumer, there is very little difference in PoS and PoW on the surface to impact their use.

Both PoW and PoS are as susceptible to network attacks if they don’t have enough security  – computing power for PoW and economic value stakes for PoS. Both Bitcoin and Ethereum are large enough, with diverse and numerous validators or miners securing their networks.