When playing baseball, a home run requires the batter to hit a fair ball that travels over the outfield fence, allowing the batter to scale the bases unopposed. It is only possible to score a home run because the players, referees, and spectators all agree on the parameters that define it. If one team believed the ball had to cross a fence to compose a home run, but the other team believed the ball also had to bounce off a tree in order to qualify, the lack of consensus would call the status of the achievement into question.
When it comes to finances, there can be no question. Nobody wants to give three Bitcoins to a real estate broker and then hear the words “Congratulations, you might have bought a house.”
Consensus mechanisms facilitate agreement among the nodes in a blockchain network. In simple terms, they make sure every player agrees on the rules of the game.
The consensus system protects the decentralization of the network by ensuring it does not rely on a single point of failure; but it also protects the security of the network, by ensuring it does not rely on a single point of authority. For example, if baseball did not have a rule book, there would be nothing to stop a batter from hitting a ball two feet and then declaring a “home run”. Likewise, if there were no consensus mechanism on a blockchain, there would be nothing to stop a single bad actor from unilaterally validating transactions on the blockchain to make themselves rich.
How Blockchains Validate Transactions – PoW, PoS, and Beyond
Proof of Work vs Proof of Stake are two primary consensus mechanisms used in cryptocurrency networks to validate transactions. The key difference lies in how they determine who gets to validate transactions. PoW relies on computational power, where participants compete to solve complex puzzles, while PoS utilizes a lottery-like system where participants are chosen based on their stake of cryptocurrency.
On a PoW blockchain, such a Bitcoin, your odds of hitting a block are directly proportional to the amount of processing power you have. On a PoS blockchain, such as Etheruem or Cardano, your odds of hitting a block are proportional to the amount of the currency that you personally own. It’s important to note that only coins on a PoW blockchain can be mined, as PoS chains reward blocks based on a random draw.
A third method, known as Delegated Proof of Stake (DpoS), is a consensus mechanism where network users vote for delegates to validate transactions. Instead of every user directly participating in the validation process like in Proof-of-Stake (PoS), DPoS allows a smaller group of elected delegates to handle the work.
Proof-of-Work
The concept of Proof of Work (PoW) was initially proposed in 1993, as a way of combating email spam and denial-of-service attacks. Later, in 1997, Adam Back implemented a PoW mechanism called Hashcash, further solidifying the concept. Since then, a few other attempts at real-world implementation have been made, but PoW was not widely adapted until Bitcoin was developed and subsequently popularized by Satoshi Nakamoto.
With this method, miners to compete to solve extremely complex mathematical problems. The first miner to the finish-line validates the transaction, and earns a block of that currency as a reward for their contribution. The solution is then verified by the other nodes on the network, to ensure that the majority agree on the state of the blockchain ledger, preventing a single entity from controlling it.
The puzzle-solving process of the PoW mechanism secures the network in several ways:
1. Energy-intensive: Solving the puzzle requires significant computational power and energy. This makes it difficult for malicious actors to launch attacks, as they would need substantial resources.
2. Computational effort: The puzzle’s complexity ensures that finding a solution takes time and effort. This slows down the process of adding new blocks, making it harder for attackers to manipulate the blockchain.
3. Immutable chain: Once a transaction is confirmed and added to the block, it becomes effectively permanent, also referred to as immutability. This permanence is enforced by cryptographic hashes that interlink each block on the chain. Altering any one block would invalidate every subsequent block in the chain. Creating a fraudulent block would require recalculation of all subsequent blocks, which is computationally impractical for bad actors. If it were even possible to do, the amount of energy a hacker would consume solving the subsequent blocks would cost more than what the crime actually paid out.
Notable projects utilizing PoW include Bitcoin, Dogecoin, Litecoin, and Ethereum Classic.
Proof-of-Stake
In PoS systems, validators are chosen to create new blocks based on the number of coins they hold and are willing to “stake” as collateral. These coins are are essentially locked, meaning they cannot be traded or sold while staked. This discourages malicious behavior, as validators risk losing their stake if they don’t follow the rules.
Block validators are randomly selected using a lottery-like system based on their economic stake in the network. The more coins you stake, the better your odds of being selected to validate a transaction, thereby earning a block reward. Think of each coin you stake as a “ticket” in the blockchain lottery. This approach significantly reduces energy consumption compared to PoW, as it eliminates the need for resource-intensive computations.
Notable projects utilizing PoS include Ethereum (ETH), Cardano (ADA), Polkadot (DOT), Algorand (ALGO), Cosmos (ATOM), Tezos, and Avalanche. This comparison—Proof of Work vs Proof of Stake—is important when considering sustainability and energy use.
Delegated Proof-of-Stake
Another innovative approach is Delegated Proof of Stake (DPoS), which introduces a layer of delegation into the consensus process. In DPoS systems, stakeholders elect a small number of delegates who are responsible for validating transactions based on their perceived qualifications. This method enhances scalability and transaction speed while still preserving decentralization to some extent.
Notable projects utilizing DPoS include EOS and TRON, which have garnered attention for their ability to process thousands of transactions per second.
Double Spending and 51% Attacks
Digital currencies exist as data, which can be easily copied. Without a mechanism to prevent it, someone could potentially send the same digital currency to multiple people simultaneously, thereby spending the same token multiple times. This is known as “double-spending”, and it is one of many reasons that consensus is absolutely crucial to the health and stability of the blockchain.
Consensus among nodes is achieved by keeping a single data set — the mutually agreed-upon version of a blockchain’s immutable transaction history — rather than letting each individual node maintain it’s own copy of the database in it’s entirety. Nodes receive input data from a pending transaction, and subsequently approve or disapprove the transaction after checking it against the blockchain’s rules.
For example, it verifies that the transaction is properly signed/authorized, that the sender has enough available funds, and then it cross-checks the request against it’s own copy of the blockchain to make sure that the purchase is not part of a transaction that has already been completed, which is done to prevent double-spending. If a user attempts to complete transaction with coins that have already been used, the transaction will be rejected.
Centralization and Security
Critics of the PoW mechanism have expressed concerns about centralization due to mining pools that dominate hash power. For example, as of this writing, more than 60% of newly mined Bitcoin blocks are generated by only three leading mining pools. This centralization of power raises significant concerns regarding network security, as a limited number of entities can exert excessive influence over the entire blockchain. For instance, if a single mining pool dominates a large share of the network’s hashrate, it could feasibly initiate a ‘51% attack’, granting them control over the entire blockchain.
In contrast to PoW, PoS and DPoS aim to distribute power more evenly among participants. There’s still a risk of centralization based on the concentration wealth; those with more coins have more control. The odds of success in a 51% attack against a PoS blockchain is low, as it would require a single entity to own 51% of the coins in the entire blockchain.
Scalability and Sustainability – Why Proof of Work vs Proof of Stake Matters
The PoW consensus mechanism has proven effective in maintaining Bitcoin’s security and integrity since its inception in 2009. However, the reliance on PoW has also raised concerns regarding energy consumption and scalability.
The environmental concerns associated with PoW systems is their massive energy consumption. The computing power required to solve blocks and secure the network demands significant electricity, often from non-renewable sources, and that lead to an increase in carbon emissions.
As more miners join the network, the difficulty of solving the block puzzles increase, leading to higher energy consumption and longer transaction times. This is severely limiting transaction throughput on PoW powered blockchains. Bitcoin, for example, can only handle seven transactions per second (TPS), which pales in comparison to centralized payment systems like Visa that can process thousands of TPS.
To address issued associated with both scalability and efficiency, Ethereum switched to the PoS mechanism in September 2022. This upgrade reduced the network’s energy consumption by 99.9%, and paved the way for future scalability enhancements, as PoS can handle significantly more transactions per second than PoW,
Additionally, Layer 2 innovations such as the Lightning Network for Bitcoin, or Plasma for Ethereum, aim to enhance scalability by processing transactions off-chain, while still leveraging the security of the underlying blockchain.