PoW vs PoS: The Next Industrial Revolution

PoW vs PoS: The Next Industrial Revolution

Feb 07, 2024 | 7 min read

The first Industrial Revolution saw society transformed by the power of coal. This former king of resources fueled the engines of progress, but as our understanding evolved, we saw coal’s darker side: its dirtiness, inefficiency, and environmental toll. A similar narrative has unfolded in crypto: Proof of Work (PoW) - the mechanism behind Bitcoin - is the coal of the digital age - its role at the inception of crypto is undeniable, but so are its limitations…

The most prominent alternative to PoW so far is Proof of Stake (PoS) – if not renewable, then the natural gas to PoW's coal. As PoS gains momentum and market share, we have seen variations of it such as Delegated Proof of Stake (DPoS), which is employed by Radix and other networks.

This evolution, akin to refining our energy sources, promises enhanced scalability and inclusivity. As we delve deeper into the dynamics of PoW, PoS, and DPoS, we'll see how these shifts move the decentralized web toward a more sustainable, efficient, and democratized digital future.

Sybil Prevention

PoW and PoS differ in their methods but both have the same aim: to impose a prohibitive cost on gaining majority control of a network like Bitcoin, Ethereum or Radix - a situation broadly known as a Sybil attack. In exchange, both methods reward participants for their efforts, usually in the network’s native asset.

In this context, ‘control’ refers primarily to the consensus mechanism - the method by which the network agrees which transactions are valid. In PoW this is achieved through mining, and in PoS by running a validator. As transactions are created by users, approving them amounts to a vote, meaning that if an attacker were to gain over 50% of the voting power, they could fabricate and approve any number of beneficial transactions. A sustained attack of this kind would eventually destroy the integrity of a network and the value of any assets it hosts - defeating the object - but exiting an attack before that point could net a significant payout for anyone with the means to do so.

Apart from consensus, the other way to participate in a network is by hosting a node that audits the work done by miners or validators. Node operators might seem ancillary, but collectively they wield enormous power by deciding which version of the consensus software is canonical. Miners and validators also run nodes, but if a majority were to decide to run software that rejects legacy transactions, it would be unviable for miners and validators to depart from the economic majority of the network by doing otherwise.

There are then, two distinct types of Sybil attack in crypto networks: one, by dominating the consensus mechanism within the existing rules; and another, a critical mass of nodes issuing new rules, either by social consensus or a proliferation of malicious nodes.

PoW - Computational Friction 🔢

PoW introduces computational friction by requiring miners to notarize each block of transactions with a unique cryptographic stamp called a ‘block hash’. Hashes are alphanumeric strings but the twist in PoW is that it requires hashes to begin with a number of leading zeros, with each additional zero making the hash exponentially rarer and more computationally expensive to find. Because the transaction data itself is static, miners must append extra data by cycling through binary numbers, hashing each one together with the transaction data until the resulting hash has the required number of leading zeros.

Hashing a block 10^16 times (roughly the current requirement for Bitcoin) requires millions of dollars worth of hardware and electricity. However, once found, hashes are trivial to validate, meaning that if a miner were to admit a fraudulent transaction, their block would be rejected and their resources would have been wasted.

The positive case is ‘consensus’, specifically ‘Nakamoto Consensus’, which is when the network of miners trusts a block enough to build another one on top of it. The more cumulative PoW there is on a chain, the more trustworthy it is and the more likely it will continue to be built on by miners.

PoS - Economic Friction 💸

PoS is conceptually similar to PoW, but instead of staking computational resources, validators are required to stake the native network tokens, which are forfeited if one of their blocks is found to be invalid or if the validator otherwise behaves dishonestly or incompetently.

PoW vs PoS 🥊

Comparisons between PoW and PoS center around three properties: economic security, efficiency, and decentralization.

Economic Security & Efficiency

PoW’s simple implementation and use of real resources makes it highly secure. This robustness, however, comes at a cost: PoW systems have been strongly criticized for their inefficiency and substantial energy consumption. While critics of the latter rarely offer fair comparisons with networks such as the global banking system, PoW’s inefficiency is less easy to defend: its competitive and serial nature means that every participant must race to hash every block, despite there only ever being only winner among thousands of miners.

As an illustration, Ethereum researcher Justin Drake estimated in March 2022 that switching to PoS made Ethereum 3.5x more economically secure than Bitcoin and 33x more efficient:

In addition to being more economically efficient at securing value than PoW, PoS is also more capital efficient because it doesn’t require the consumption of real-world assets:

In the above tweet, Dan Robinson is arguing that even though both PoS and PoW may be costly on an individual basis, only PoW is costly to society in its use of real world resources. For a deeper dive on this topic, check out our article on Money, Wealth and Volcanos.

Decentralization

Decentralization is a multifaceted issue, encompassing geographical, socio-economic and technical considerations.

Geographical Considerations

On the geographical aspect, PoW mining farms are conspicuous because of the amount of electricity their hardware consumes. They are also tend to locate to areas where electricity is cheapest. Both of these factors make PoW systems vulnerable to national sanctions of the type seen during 2021 in China.

In contrast, PoS systems require minimal external resources and lower up-front capital costs, which means that validator software can be run more discreetly on consumer hardware by anyone with an internet connection, facilitating geographical - and political - decentralization.

Socio-economic Considerations

Although mining rigs and validators both require a level of expertise to operate, the simpler implementation of PoS caters to a broader gamut of users than the specialized hardware needed for PoW. On the other hand, PoS has been accused of precipitating wealth concentration, since those with more tokens have a higher chance of being selected to validate transactions and earn rewards, allowing them to compound their holdings over time.

PoW mining is designed such that the cost of production remains roughly equal to the value of new coins (a rising price attracts more mining resources, which increases the mining difficulty, and thus the cost of production). Staking doesn’t have such a mechanism, but its lower accessibility arguably has the same effect by enabling new stakers to arbitrage high yields, effectively pegging them close to the cost of production.

Technical Considerations

Most other comparisons between PoW and PoS tend to overlook the presence of mitigation strategies or the parallels between mining equipment in PoW and staked assets in PoS.

For example, in a PoS system, those who hold a larger stake in the network's tokens have a higher probability of being chosen to add a block to the blockchain. This is analogous to PoW systems, where participants with more powerful mining hardware stand a greater chance of successfully mining a block and adding it to the blockchain.

Another distinct challenge in PoS systems is the ‘nothing at stake’ problem. This occurs in systems where validators define consensus in the event of a disagreement as building on the longest chain (Nakamoto Consensus), meaning the option with the most support from validators. Unlike PoW systems, it is trivial for validators to hedge their bets by voting on several versions of the chain, creating an issue known as the 'nothing-at-stake' problem.

DPoS on Radix

Radix employs a variation of PoS known as Delegated Proof of Stake (DPoS). In this system, instead of staking directly, native token holders can delegate their stakes to validators, who run the validating software on their behalf and compete on the basis of their fees and reliability. This arrangement allows for a more diverse participant pool than traditional PoS systems by enabling users who don’t have the technical expertise or sufficient holdings required to become a validator to still participate in network security and consensus.

DPoS though, is not without its own challenges. One of the most significant is the risk of centralization. If a small number of validators end up controlling a majority of the delegated stake, the network could become vulnerable to a coup. To guard against this, DPoS also implements the slashing conditions mentioned above, although these have not yet been introduced on Radix.

Validators are responsible for securing the delegated stakes and ensuring they act in the best interest of the network. Any misbehavior on their part could lead to significant losses for the delegates. As such, delegates must be careful in choosing trustworthy validators.

Despite these challenges, DPoS systems like Radix provide an efficient and inclusive alternative to traditional PoW and PoS mechanisms. It is also worth noting that Radix’s consensus protocol - Cerberus, does not reference the longest chain, so avoids the nothing-at-stake vulnerability of Nakamoto Consensus.

Conclusion

While PoW has served as the foundation for cryptocurrencies, its substantial energy consumption, economic inefficiency, and geographic centralization, are anachronisms that will inevitably be jettisoned by a new generation that demands higher standards. As the digital age evolves, the transition to PoS and DPoS marks a shift towards more sustainable and efficient ledgers like Radix. Mirroring the journey from coal to cleaner energy sources, this evolution underscores the industry's commitment to addressing the limitations of its predecessors. With PoS and DPoS, the blockchain world is moving towards a more inclusive, scalable, and environmentally friendly future, promising a decentralized web that not only reduces its ecological footprint but also democratizes participation. As we navigate this transition, the promise of a more efficient and equitable digital ecosystem heralds a new era of technological progress grounded in sustainability and inclusion.

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