Let’s get to the bottom of it. Is PoS really better than PoW?

“As PoS continues to gain traction, it can be expected that the proportion of PoS will exceed that of PoW in the near future.”

In order to gain a deeper understanding of Staking and PoS (Proof of Stake), in this article we will compare it with the current most mainstream consensus mechanism - PoW (Proof of Work).

Currently, most public chains use PoW, but as PoS gains more and more attention, it can be expected that in the near future, the proportion of PoS will exceed PoW.

Almost all newly launched public chains are now based on PoS, and even the second largest public chain Ethereum will switch to PoS in the next major upgrade. Why is this? Is PoS really better than PoW?

PoS is indeed superior to PoW in some aspects. In the following, we will compare and analyze the two from several dimensions.

1. Definition of PoS

First, let's explain the basic concept.

| PoW and PoS are two different algorithms that determine consensus in a distributed network and how consensus maintainers are rewarded.

In other words, PoW and PoS explain how to issue new coins to incentivize the network and reward consensus maintainers who provide resources. The value of these coins is supported by resources (mining machines, ASIC chips, or a certain number of coins, etc.), and the premise for getting rewards is that you must take honest actions. This is true for BTC, ETH, and XTZ.

You might say: providing or locking certain resources in the network and taking certain risks sounds a lot like Staking. Yes, it is!

PoW can actually be understood using the logic of PoS. Spending money on mining equipment and electricity is equivalent to a form of Staking. We can further summarize that Staking is a traditional economic form - investing capital to get returns.

Although this understanding is not wrong in some cases, let’s go back to the definitions of the two and their core differences.

The security of the PoW network comes from hash power. In theory, the greater the hash power, the higher the profit. For details, please refer to Bitcoin miners and mining pools.

The security of PoS comes from the value of the mortgage economy. In theory, the higher the amount of staking, the higher the return. (The reason why I say "in theory" is that the selection of validators is random, which can avoid excessive centralization.)

While every consensus protocol is different, there are some basic principles that we can compare.

Next, we will compare PoW and PoS in terms of development trends, scalability, network security, decentralization, cost, governance, community participation, cold start, and environmental protection.

2. Development Trend

Although PoS has a shorter history than PoW and a smaller share of the overall market, it is developing rapidly.

In fact, thirteen of the top thirty cryptocurrencies by market cap already use PoS or PoS-like protocols, including EOS, Stellar, Tron, Dash, Neo, Binance Chain, Ontology, Tezos, NEM, VeChain, Waves, Qtum, Decred, Lisk, and three more (ETH, Cardano, and OmiseGO) are in the process of moving to PoS.

This also means that more than half of the top 30 currencies in the market are using PoS. In addition, almost all second-layer solutions are using the Staking mechanism. Even Bitcoin's Lightning Network can be considered a form of PoS: some relay nodes stake Bitcoins, help users trade through channels, and earn some fees from it.

• Total Staking Market Cap: > $16 billion

• Total value locked in staking: > $5 billion.

• PoS market share: 9.80%

• PoS market capitalization excluding BTC and ETH: 26.6%

(Source: Stakingrewards.com 29.04.2019)

These numbers continue to grow, and many expect the total value of PoS chains to reach $50 billion by the end of this year. With Binance Chain, Cosmos, and Polkadot moving various projects to PoS blockchain protocols, and the launch of ETH 2.0, the total value of PoS chains may exceed this scale.

Proof of Stake (PoS) seems to be slowly taking over the market.

Scalability

When talking about scalability, one must consider transaction throughput and transaction confirmation time.

Transaction throughput : The block time and block size limit the transaction throughput of the network. The block time of Bitcoin using the PoW mechanism is about ten minutes, and other currencies are shorter. Ethereum can be reduced to fifteen seconds. The transaction throughput will also increase slightly as the block time decreases.

With the joint efforts of PoS consensus maintainers (such as Validators and block producers), the transaction throughput is much higher than PoW on average because the block time is much shorter.

For example, Tezos can already achieve 40 transactions per second (40 TPS). EOS and TRON in DPoS (delegated proof of stake) can even process transactions exceeding 1,000 TPS.

(Source: https://blocktivity.info/ )

Transaction confirmation time: Transaction confirmation time is also an important factor in blockchain scalability, especially in a business environment. In the PoS consensus mechanism, transactions are faster and can even be confirmed almost in real time in some scenarios.

4. Network Security

As we all know, Bitcoin was launched as a pioneer of PoW as early as 2009 and has been running stably for more than ten years. Later, many other digital currencies also adopted the PoW consensus mechanism. Over the past ten years, PoW has become a public chain design template, which has experienced many attacks and its reliability and security have been tested.

In the short term, PoW may be threatened by mining monopoly, and 51% attacks may be launched by purchasing external equipment to increase computing power. However, for Bitcoin, it is almost impossible to purchase hash power to carry out such attacks, but it is feasible for some small-scale PoW chains, such as Verge and ETC.

If we want to estimate the cost of launching a 51% attack on Bitcoin, we first need to consider the cost of hardware and electricity.

• Total hash rate: 50,000,000 TH/s

• Antminer S9 Current Price: $300

• Antminer S9 hash rate: 13 TH/s

• Hardware cost of 51% attack: $1,153,846,153 USD (~1.11% of network value)

PoS and Staking are still new things. Although coins like PeerCoin and Ardor have existed for a long time, the first mainstream PoS chain Tezos was not launched until the summer of 2018.

PoS coins have not been rigorously stress-tested, so we don’t know what kind of problems they might face.

The following are some of the attacks that PoS may face:

Long Range Attack

A long-range attack is when an attacker creates a long blockchain branch starting from the genesis block and attempts to replace the current legitimate main chain. This branch may contain transactions and blocks that are different from the main chain, so this attack is also called a replacement history attack or a history overwrite attack.

Non-profit attack

Nothing at Stake Attack

PoS networks also have no-interest attacks. Unlike PoW, PoS has a low cost to run multiple chains, and validators can vote for multiple chains without suffering any losses, which violates the consensus protocol.

51% Attack

51% Attack

You might think that launching a 51% attack requires holding 51% of the total coins, but in some PoS networks, only a minimum of 33% of the staked funds are needed to launch such an attack.

And if they can absorb other people's votes, the attacker doesn't even need to use his own coins to launch the attack. They can even obtain votes by purchasing or bribing.

Another point is that the 33% I mentioned is not 33% of the total supply of the PoS coin, but 33% of the Staking pool. If you calculate it this way, the amount of coins needed to launch a 51% attack will be less.

Low Staking Participation Rate

Low Staking Participation

As mentioned above, in some PoS networks, only 33% of the coins in the active fund pool need to be staked to launch a 51% attack. For example, if the stake rate is 25%, 33%*25%=1/12, which means that only 1/12 of the total supply of the PoS coin is needed to launch an attack.

Private key attack

Private Key Attack

Once the private key is obtained after being connected to the Internet, the attacker will obtain ownership of the Staking funds and the right to sign transactions. Even if the private key does not directly control all Staking funds, obtaining the private key will gain the power of Validation and Staking, making it easier to launch an attack.

Therefore, a big security risk in the PoS network lies in the process of transferring the network value (stake) to the Validator, which may lead to high centralization and network attacks. As long as you have a lot of resources, you can launch an attack by buying votes or the monopoly of the Validator.

A similar situation is happening with LISK, where Validators have set up several organizations to manipulate incentive shares. EOS’s Validators have also formulated the EOS Constitution, stipulating that voters cannot receive any rewards.

Please pay attention to the above-mentioned attacks. Some PoS may have taken precautions against these attacks at the beginning of their design, but PoS has not yet undergone actual stress testing.

Hybrid consensus mechanisms such as Elastos have also begun to emerge. For security reasons, it uses Bitcoin as the parent chain in mining, and at the same time has a DPoS consensus algorithm similar to EOS. Such a hybrid consensus mechanism is also worth exploring.

5. Decentralization

PoW

PoW mining relies on machines and equipment, which have high barriers to entry and the technology is monopolized by a few companies.

Mining is also a difficult undertaking because purchasing ASIC chips is a long-term investment and is not as liquid as PoS funds.

Moreover, the profit of mining is very low now, and only large enterprises with hardware technology and cheap electricity can make a profit.

PoS

Unlike PoW, the core of the PoS consensus mechanism is the coins in the network, which can be purchased in large quantities on exchanges or even OTC markets, without the need to be obtained through mining, so there is almost no threshold for participating in Staking. In the PoS consensus mechanism, super nodes can get rewards by running and maintaining the network, so the motivation to run nodes is very high.

Although not everyone is willing or able to run a node, the staking mechanism is important for decentralization because PoS allows all coin holders to vote and participate in consensus without running a node.

But do you think that the rich get richer under the PoS consensus mechanism? Compared with PoW, this is not the case. In the PoW consensus mechanism, the rule of "the rich get richer" is more obvious. Rich miners can buy a lot of ASIC mining machines. They have resource advantages and enjoy high returns. PoW's big miners enjoy the returns under economies of scale; but for PoS Stakers, there is only linear income.

(Source: 3IQ Research Group)

6. Cost

When discussing costs, we have to consider three aspects:

1. On-chain transaction costs

2. The capital cost of maintaining the blockchain

3. Inflation costs required to compensate validators or miners

On-chain transaction costs

Storing data on a public chain is extremely expensive, as each byte needs to be transmitted to and stored by every node in the blockchain network.

In the PoW consensus, the cost of Bitcoin transactions is about $1.91 per transaction, and the cost of Ethereum transactions is about $0.1 per transaction. The transaction cost will fluctuate with the rise and fall of the currency price. At some point during the bull market peak, the transaction fees of Bitcoin and Ethereum could be as high as $54.9 and $5.5 respectively.

In the PoS consensus, transaction fees are much lower. Take Tezos for example, the transaction fee is only about $0.01 per transaction, and other PoS coins like Cosmos are similar.

Now, let’s take a look at the cost of maintaining a blockchain.

The cost of maintaining a blockchain

PoW requires high hardware and electricity costs, while in PoS, becoming a Validator only requires a secure and well-functioning device and very little electricity costs.

In the Bitcoin network, the annual hardware maintenance cost is approximately $2 billion (the life of this hardware is approximately 18 months), and the electricity cost is approximately $4 billion (electricity is calculated at $0.08 per kilowatt).

This means that for the normal operation of the PoW network, 6.5% of the total value of the network needs to be invested. In the PoS network, the maintenance cost only accounts for 0.1% of the total value of the network.

Cost of inflation

In PoS networks, the inflation rate is about 6%, while in PoW networks, it is about 4% (just an estimate).

The incentive design of the blockchain will reduce inflation over time. PoW has existed longer than PoS, so we can say that the inflation levels of the two are similar, and the inflation rate of PoS will become lower and lower in the future.

In the PoW network, investors who are not miners do not have a good way to resist inflation, but in the PoS network, coin holders can obtain certain returns through coin-to-coin.

VII. Governance

In a PoW network, protocol governance can be divided into several parties:

1. Miners: decide whether the transaction information is confirmed and which chain to mine

2. Users: Decide which protocol to accept and which ecosystem to use

3. Foundations: Decide how to allocate funds among different development organizations

4. Node: decides which software to run and provides services to users through API

In a PoW network, it is difficult to say who holds the most voting power, as voting power in PoW is difficult to quantify. However, in order to maintain the network and manage the huge resources and network, there still needs to be a consensus among all parties. The lack of transparency in governance in PoW networks makes the design and upgrade process of the protocol slow.

PoS governance is also distributed among the groups mentioned above, but the governance mechanism is more systematic, and we can follow a simple rule - 1:1 voting.

Moreover, in the PoS network, we can implement on-chain governance (in fact, it can also be implemented in the PoW network, but it has not been tried yet). On-chain governance allows us to create protocols or propose improvements to protocols, and we can also vote on the chain. Based on the results of the on-chain vote, the protocol can be automatically executed. Currently, Tezos adopts this on-chain governance mechanism.

Other examples of PoS governance voting include:

• EOS

• Decred

• Dash

• Cosmos

The clear and transparent voting design in PoS governance facilitates the rapid implementation of protocol changes.

8. Community Engagement

PoW miners have traditional business thinking and prefer to invest in a traditional business model that they are familiar with. For them, mining is similar to factory manufacturing. Mining equipment is production equipment, and the more advanced the technology, the higher the efficiency. Cheap electricity is a necessary resource for the mining industry, and these business models rely on market prices in the same way that traditional factories rely on steel prices.

There are risks, of course: if the price of a cryptocurrency drops, mining may become unprofitable, but in most cases, selling all coins at market price will make money.

Most of today's miners are people who have certain resources for mining equipment and electricity, and they rarely have the motivation to participate in the community. If they really believe in the value of the currency, direct investment can bring a lot of returns. The return of direct investment in Bitcoin now exceeds that of mining, and we believe that this trend will not change in the long run.

In contrast, the Validators in PoS are more like investors, who need to have a deep understanding of the technology behind the digital currency they hold and contribute to the development of the protocol. Large PoS currencies generally have independent research teams.

In order to get more votes, these validators generally need to hold a large amount of coins. Through staking or providing staking services, these funds will be locked for a certain period of time. If they want to use part of the funds, they may not be able to continue to provide services to all customers.

This way, validators become long-term investors who are more motivated to drive technology and value. The higher the incentive, the more they invest.

This is like early stage venture capital, where VCs provide support to the companies they invest in. This metaphor vividly summarizes the mining investment theory and became popular after Coinfund used it.

9. Cold Start

What is the best way to launch a public chain? Given the role that tokens play in public chain adoption and financing, we must consider how the public can obtain tokens.

It is very simple to issue a PoW chain. Initially, the issuance of PoW is 0, and everyone has equal participation rights through mining. This process seems relatively simple, equal, and transparent.

In order to support continued protocol research and development, a development fund can be established like Zcash, with a small portion of block rewards directly awarded to developers.

The cold start (Bootstrapping) of the PoS network is more complicated. From the very beginning, multiple parties are required to hold a portion of the equity, and the ICO ratio is determined before the issuance.

The most common method is a token issuance (either an ICO, IEO, or some other form), where the original token supply is sold or distributed to investors, developer teams, foundations, boards of directors, etc.

Because large investors who participate in the original equity distribution have a high entry threshold and can also get generous returns, this type of token issuance is generally not fair and has more restrictions for ordinary investors in the community.

The vesting periods for tokens are often opaque and change frequently, which means that investors may be diluted without knowing it.

Another way to issue tokens is through airdrops, where people receive a certain amount of tokens without having to invest directly. This type of token airdrop usually happens without the recipient’s knowledge and the amount is extremely small, almost negligible compared to the total amount. Due to the lack of transparency, this does not seem to be the best method either.

In addition, there are some other cold start methods, but it is still in the early stage and it is difficult to draw conclusions now. One of them is the concept of "cross-chain airdrop" introduced by Cosmos, which is implemented through hard partitioning (hard spoon) - by copying the balance of a digital currency account on a PoW or PoS chain to a new PoS chain, the new digital currency on this chain is interoperable and can be used for staking.

“Hard Spoon: A new chain is formed based on the state of an existing blockchain network; the new chain does not compete with the original chain, but provides wider access.” Jae Kwon, founder of Tendermint

10. Environmental protection

If we look at the cost of protecting a public chain, PoW is much more expensive than PoS, after all, the equipment and electricity costs are very high. From this perspective, PoW is obviously not environmentally friendly.

Despite this, we believe that the electricity consumed is insignificant compared to the value we get. What we get is a trustless, global, tamper-proof, and highly secure ledger. Compared with the cost of gold mining and the existing financial system, the cost of PoW is not that high. If we only look at the impact on the environment, we admit that PoS is better because it is more environmentally friendly.

in conclusion

In this article, we compare PoW and PoS from several dimensions. Neither is perfect, and there will not be a consensus mechanism that unifies the world in the future.

We strongly believe that at least one PoW chain will eventually exist, and it is likely to be Bitcoin. The PoW chain provides unparalleled security and irrevocability, and can serve as a global settlement layer and a source of real data. There are many aspirations and controversies surrounding Bitcoin.

More and more new blockchain protocols are beginning to adopt the PoS security model, and as Ethereum gradually shifts from PoW to PoS, the proportion of PoS will also increase significantly.

Most second-layer solutions also adopt PoS, making the topic of Staking a hot topic in the blockchain world.

If we look at interactive and application-oriented PoS chains like Cosmos and Polkadot, we will find that PoS will even be connected to some PoW chains like Bitcoin, Monero, and Zcash. These PoW chains need to have their own zones, parachains, and bridges or connect with them to indirectly become part of the Staking economy.

To sum up, the reasons for the rise of PoS are:

1. You can earn Staking income without being diluted by inflation

2. Low barriers to entry to participate in consensus

3. More scalable

4. No economies of scale, more decentralized

5. Lower cost to maintain blockchain

6. 1:1 voting, more transparent governance

7. Higher incentives for consensus maintainers (such as Validators) and the community

8. More environmentally friendly

It is worth mentioning that the advantages mentioned above come at a price. PoS does not have traceable historical data like PoW. In the future, as the overall market matures, we will see that the development trajectories of PoW and PoS are becoming more and more complete, and easier for us to learn. Of course, there will not be a situation where one chain dominates the world, just as there will not be only one algorithm. PoS+PoW hybrid systems like Decred may become more and more popular, but this is another topic.