On September 15, 2022. Ethereum, the second largest crypto in the world, successfully transitioned from proof-of-work (PoW) to a proof-of-stake (PoS) consensus algorithm via the Merge update. This transition has sparked a lot of debate about the pros and cons of these algorithms. This blog will take an unbiased look at both PoW and PoS.
What is PoW?
Governance is simple in a centralized ecosystem – you have a central board of directors or a CEO making all the big decisions. However, how do you implement robust governance in a decentralized model?
You will need to trust the participants to consistently do a good job. However, any model that relies on “trust” can’t be that efficient and reliant. Plus, seeing how crypto protocols deal with millions and billions of dollars, it is even more crucial to have a trustless and robust governance process that can be easily replicated. In particular, Nakamoto wanted an algorithm that fulfilled the following criteria:
- The consensus process itself should be really tedious.
- Proving that you have reached the correct conclusion using the consensus should be simple.
- Successful participants should be rewarded for their efforts.
- Malicious participants must be punished for working against the protocol.
- Last but not least, the algorithm must provably solve double-spending. Double-spending is an issue where the same crypto coin can be spent on two (or more) completely different transactions simultaneously
Keeping all these in mind, Nakamoto devised a consensus mechanism called proof-of-work. This is how the algorithm works:
- Users wishing to participate in PoW must buy mining equipment like GPUs and ASICs.
- The users, aka “miners,” will then use their GPUs and ASICs to solve cryptographically-hard puzzles.
- If they can successfully solve this puzzle, they get the right to add a block to the blockchain and earn block rewards.
- Before adding the block, the miner must propagate their block throughout the network to validate their work. The act of block validation (or “showing proof of your work”) is relatively straightforward.
Miners use real-world computational power and electricity to participate in the mining process. The degree of difficulty of the process is directly related to the number of active miners in the protocol. The overall cost of mining is also directly related to the difficulty of the process.
How PoW Prevents double-spending?
As we mentioned earlier, preventing potential double-spending attacks is one of the core functions of PoW. So, what is a double-spending attack?
What you see in the diagram above is a “fork,” basically a split in the chain. So, a user can potentially spend the same coin in the main chain and the forked chain. As you can imagine, this could cause massive confusion. Think of it like this. Imagine that you spent your BTC buying a house in the blue chain and the same coin purchasing a car in the red chain. Which one of these transactions should go through? For malicious miners who may look to discredit Bitcoin, creating random forks and deeming the majority of the transactions completely useless may be the best way to go about it.
So, does PoW completely negate forks? No, it doesn't.
However, PoW makes forking extremely expensive and impractical. For example, if a malicious miner decides to take over the Bitcoin blockchain through a fork, it will be challenging for them to do so against the combined might of the rest of the miner network.
To do so successfully, they need to have control of over 51% of the network’s mining power (or hashrate). This is also known as a 51% attack. When an entity has control of over 51% of the network hashrate, it can basically create multiple random forks and rewrite the entire system. However, in a PoW system, it becomes exceedingly expensive to conduct a 51% attack. For example, in Bitcoin, it costs ~$750,000 to conduct a 51% attack for just 1 hour.
But PoW has a big problem
PoW’s biggest problem is that it is inherently extremely wasteful. Check out this chart:
Bitcoin consumes more electricity than Noway and Bangladesh! However, what about its carbon footprint? Now, what about its carbon footprint? As per reports, Bitcoin is responsible for 22-22.9 million metric tons of carbon dioxide emissions annually! That’s the same as countries like Jordan and Sri Lanka. This wastefulness of PoW has attracted a lot of negative criticism. This is why several protocols have started opting for proof-of-stake (PoS), a significantly cleaner alternative.
What is PoS?
Proof-of-Stake makes the mining process completely virtual. In 2012, Peercoin became the first coin to implement PoS. Following that several other cryptocurrencies like Cardano, Algorand, and, most famously, Ethereum followed suit. Each coin has its own unique implementation of PoS. However, for your understanding, let’s give you a simplistic overview of the entire process:
- Instead of buying ASICs and GPU, you need to lock up a certain amount of tokens as a “stake” within the system.
- Your “mining power” depends on the amount of stake you lock up within the protocol. The more stake you have, the more your chances of validating a block and getting a block reward.
- While traditional PoS isn’t exactly faster than PoW, it simplifies the integration of scalability techniques like sharding.
- The entire process is virtual and doesn’t require you to waste resources.
Ethereum Merge and PoS
On September 15, 2022, Ethereum deployed the Merge update and transitioned from PoW to PoS. Ethereum’s staking algorithm is called Casper, and its signature feature is the “slashing mechanism.” Slashing is how Ethereum prevents the blockchain from forking.
To participate in Ethereum’s PoS, you must stake at least 32 ETH, which is a significant amount. Furthermore, if you act against the system and attempt to fork the chain, your stake will get slashed, meaning you will lose a substantial amount of your own money.
This has been designed to ensure that the validators are economically incentivized to always act in the system's best interests. However, like most PoS algorithms, Ethereum’s Casper also has a significant weakness.
The biggest problem with PoS
The biggest problem with the majority of the PoS algorithms is their overdependence on just one token. This leads to the following issues:
- The system favors early adopters who may have gotten a big bag of native tokens for cheap.
- Being dependent on a “stake-as-trust” system could have protocol-breaking implications in a cross-chain ecosystem. Let’s say you transfer BTC from Bitcoin to Ethereum to access certain DeFi apps. If the value of BTC is higher than the stake, then the validator is incentivized to act maliciously.
How KIRA mitigates these issues with MBPoS
KIRA's native MBPoS consensus stands for “Multi-Bonded Proof of Stake.” With MBPoS, you can stake multiple assets simultaneously and participate in the consensus process. With MBPoS, you may stake real-world assets like fiat and commodities and popular crypto assets like BTC, ETH, DOT, and even NFTs. The revenue generated can be shared among all your staked assets, increasing the value proposition of each token.
Here’s a quick overview of MBPoS:
- By enabling the staking of multiple assets, KIRA resolves potential trust issues.
- MBPoS guarantees transaction finality and fast block times.
- By allowing multiple tokens, MBPoS creates a fairer system that doesn’t overtly reward early adopters.