There’s been some heat going around the Ethereum’s decision to move from proof-of-work to proof-of-stake. With this, it’s natural to have hundreds of questions pop up everywhere. I will try to explain the fundamental difference between the two consensus methods. I will also tell why do some prefer proof-of-stake over proof-of-work and others don’t. Then, it’ll be up to you to make up your mind.

I’ll keep using the term ‘timestamping’ throughout the post. It means the network reaching to a consensus for a block. The majority of the network must be a consensus about a block for it to be appended to the chain. When a block is appended to the chain, it gets timestamped, thus, the term.

I explained proof-of-work in the ultimate guide in plain English to understand Blockchain. If you haven’t read it yet, please do, because we will be carrying it forward from there in this blog post.

_By the way, I am the editor of a weekly newsletter, Unmade, which delivers one idea from the future to your inboxes.

How Proof of Work (PoW) works?

“Work is much more fun than fun.” — Noel Coward

In proof-of-work, nodes in the network work to put a block of transactions at the end of the ever growing chain. This work involves calculating a hash of the block with some specific requirements. Whoever completes the calculation first gets rewarded with some amount of the cryptocurrency.

And that’s where the catch of this method lies — whoever does it first gets the reward. Thus, to get the reward, nodes tend to put heavy rigs at computational work so that they can be the first. It makes the overall network expensive to keep running. Also, there are laws of physics that govern the rate at which the computers can evolve and scale.

That’s not enough — as the average computational power in the network goes up, the difficulty for the proof-of-work goes up with it. It is done so that rewards are not given out too frequently.

Increasing difficulty level will control the amount of cryptocurrency in circulation, thus, ensuring it stays valuable.

But it comes with a cost. First, more difficult the problem, longer it takes to solve. More difficult the problem, more electricity it takes to compute. Thus, the value of the cryptocurrency costs time and money.

Even if we forget about the value, does it makes sense to spend so much time and money just to timestamp a block? Can there be a faster method? Can there be a cheaper way instead? Yes, there is, and it’s called Proof of Stake.

How Proof of Stake (PoS) works?

“Horse sense is the thing a horse has which keeps it from betting on people.” — W. C. Fields

At the name implies to some degree, this timestamping method means to reach a consensus about a block by betting on it. Here’s how it works.

Nodes in the network don’t spend time and electricity to solve a mathematical problem to reach a consensus; instead, they place a bet on blocks. When a block is appended to the chain, whoever had placed a bet on it, gets rewarded.

In this method, every node places a bet on its block. The nodes whose block is the honest block (i.e. it contains no fraudulent transactions) and gets appended to the chain, get rewarded. The nodes whose block turns out to be dishonest get penalized and the amount of bet that they had put get debited from their balance.

Placing bets doesn’t require high-performing computers and electricity. All a node needs to be eligible to get rewarded is some stake that it can place a bet with. The idea behind this method is, “whoever has the maximum stake in the blockchain must have the loudest voice.”

This way, the network will be fast, efficient and cheaper to run.

PoW vs PoS

“The long term versus the short term argument is one used by losers.” — Lord Acton

Now that we have understood the two methods of timestamping, let’s see how they are fundamentally different from each other. Of course, PoS is faster, cheaper and efficient. But at what cost?

The fundamental difference lies in the way how each method handles the dishonesty in the network. In PoW, if someone tries to cheat when creating a block, their dishonesty is forgiven by the other nodes in the network. In PoS, the dishonesty is penalized instead. Because forgiveness is the default in the former, there’s nothing stopping people from being dishonest. On the other hand, the PoS makes sure that dishonesty is severely discouraged by putting the penalty.

In proof of stake, besides incentivizing honesty, dishonesty is discouraged.

So, PoS is better than PoW?

Yes, PoS does provide some enhancements over PoW, but it puts the light on a different problem altogether.

We’ll take the same example with which we started this post — Ethereum. There will be a minimum amount that can be placed as the bet. While Vitalik said on Reddit that the minimum staking amount would be 1500 ETH, the current version of Casper on Github shows that it will be 1250 ETH.

The smallest betting amount would be north of a thousand Ethers. Not everyone has that sort of balance. And thus, not everyone would be able to take part in betting and getting rewarded.

Above a certain threshold, say 1250 ETH, everyone gets richer proportionally to how rich they already were. Below this threshold, poor stay poor. Over a period, the gap will become significant, and therefore, the power to influence the Ethereum network will lie in the hands of a few.

The following question will help you understand the extent of the problem -

How wise does it sound that a few people control the world’s computer?

Ethereum is the world’s largest distributed mainframe. Shall a few control it? Will it remain truly decentralized — not just in theory but practice? I don’t think so.

I also believe, the industry is too nascent, and better algorithms and methods will be invented in due time. For now, I believe, we will all have to make up our own minds which one do we prefer, given that now we know and understand both.

It’s good that blockchains have one property. If enough people don’t agree with the direction of it, they can split-off and can take it in their own direction. It’d be disheartening to see Blockchain suffer the fate of the Internet.

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About the author
Mohit Mamoria is the curator of a weekly newsletter, Unmade, which delivers one idea from the future (just like this one) to your inboxes.