Proof of Stake vs Proof of Work vs Proof of Authority

Proof of Stake vs Proof of Work

The switch highlights the fact that the validity of a chain is not derived solely from the set of rules that the protocol follows to facilitate consensus amongst the nodes concerning the current state of the network. At any time, the nodes of the network can decide to use a different set of rules to reach consensus by forking the chain and working on their own branch with their own set of rules. Earlier in this report, we Proof of Stake vs Proof of Work mentioned the notion of slashable offences whereby validators take part in malicious activities which the protocol deems as severe. One such explicitly malicious action is the proposal of two conflicting blocks in the same slot. The validators immediately have 1/32 of their effective balance deducted from their staked balance and are queued to be forcibly ejected from the validating process 8192 epochs in the future.

  • If the validator is observed to have not submitted a valid vote in the slot to which they were assigned, they will be penalised by having a small amount of their stake deducted from their balance and burned.
  • However, we also have CPU mining and ASIC mining , both of which also use PoW.
  • Although such attacks are possible in theory, the hacker would be left with a massive amount of worthless cryptocurrency.
  • The individuals/groups who perform the work for the process are called miners.

For others, believing in the project matters, because we prefer to stick to projects we like and HODL. The perceived daily income matters much less in this scenario as we simply sit on our crypto until prices take off and we then have the luxury of choosing when to sell. What we expect will happen is a shift – following Ethereum’s switch to PoW, other projects will move to PoS if the benefits outweigh the positives. However, many will still continue to believe in the benefits provided by PoW, meaning they will continue as they are.

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In order for a proposer to produce a block, they must first choose an existing chain to append it to. A proposer must choose this in a standardised way so that other nodes on the network, including validators, can do the same and come to an agreement on the result. To do so, the proposer must record every previous vote for every previously proposed block, even if that block was previously rejected. These historical votes are then used to determine the one block at the head of the chain using a decision rule called LMD Ghost. As each block has only one parent, this choice also uniquely determines a canonical chain. The Beacon chain is responsible for itself, ensuring that security standards of finding consensus are maintained in order to continue its existence as a consensus layer.

On the flipside, validators for PoS mechanisms simply stake the required amount of cryptocurrency, not fiat to start validating. Miners are constantly competing against each other to be the first one to solve the block to receive the reward, whereas validators on PoS mechanisms are chosen at random depending on the amount of coins held by the validator.

What is in store for the future of crypto mining?

However, this role grants the node extra responsibilities, and nodes that choose to deposit this sum risk losing some or all of their deposit should they perform their duties lazily or dishonestly. Lower energy requirements also mean that PoS has the potential to offer a superior economic model for the regular investor. Due to PoW miners’ continuous expenditures on electricity and advanced hardware, it is significantly cheaper to compensate PoS validators for their services than PoW miners. Miners must sell their coins to offset their high energy costs, resulting in sell pressure. PoS validators do not have to sell their staked assets, as their operating costs are significantly lower.

Proof of Stake vs Proof of Work

If the validator is observed to have not submitted a valid vote in the slot to which they were assigned, they will be penalised by having a small amount of their stake deducted from their balance and burned. This action disincentives validators from casting invalid votes, and rewards attentive participants of the network. Therefore validators’ stakes can change from epoch to epoch depending on the rewards and penalties that they accrue, despite initially depositing 32 ETH each. The slot time, 12 seconds, is the smallest unit of time recognised by the chain, meaning that the chain can confirm a maximum of 32 blocks per epoch, or 32 blocks per 6 minutes and 24 seconds. In a PoW chain, the regular arrival of new blocks is controlled by the adjustable difficulty of finding a valid hash. Where miners bundle up transactions into blocks and broadcast them to the network in PoW, proposers perform the same functionality in the PoS system.

Bitcoin

However, a 51% attack is unlikely to materialise with a cryptocurrency like ethereum for several reasons. Firstly, the total value staked is currently around $35bn, so a 51% attack would require someone to own over $17.5bn in staked ETH – that is a lot of money. Secondly, such an attack would likely have a negative impact on the value of ETH and there is little incentive for someone to ruin the value of a currency in which they have such a large stake.

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We expect this to be an aspect of the Merge that will be monitored closely. Many exchanges, including Deribit and FTX, have stated that their derivatives and spot markets will be settled to PoS ETH indices, signalling their support for the Merge. However, Deribit has also previously stated that they will credit all fork tokens to users for withdrawal only, provided that the forked chain in question meets some requirements. It is unclear whether they will also offer derivatives settled on the forked assets in the future. Nodes that choose to use this implementation will be following different rules than those nodes that accepted the Merge.

It seems relevant to mention an often talked about 51% attack on a PoS cryptocurrency where a singular entity owns or stakes 51% of the cryptocurrency. Although such attacks are possible in theory, the hacker would be left with a massive amount of worthless cryptocurrency. Utilizing Proof of Stake mechanisms essentially print their tokens before an ICO, initial coin offering, to be distributed based on their tokenomics, described in the project’s whitepaper.

What are the disadvantages of proof-of-stake?

Another potential challenge with the proof-of-stake mechanism is the potential to lead to a lack of decentralization. Since the PoS system relies on delegates chosen to validate transactions, it's always possible for larger nodes to overpower smaller ones.