Proof of Work vs Proof of Stake?

One of the greatest barriers to the more widespread adoption of cryptocurrencies is the rising fees associated with transactions. This is most prevalent in the larger currencies that continue to pick up more steam such as Ethereum and Bitcoin. However, a new idea could revolutionize how cryptocurrencies are mined and could potentially drastically reduce transaction fees as well as the environmental impact of crypto mining, Proof of Stake.

To understand Proof of Stake, we must first understand the concept that it is replacing, Proof of Work. For most major cryptocurrencies, the blockchain on which they run is generated by independent miners who use significant computing power to find a random number that causes the hash of the block to match a specific requirement set by the community. For example, Bitcoin currently has to have the blockchain hash start with 32 0s in binary. This is known as Proof of Work as the miners have to prove how much work they've put into finding that special number that satisfies the requirement. Since miners get a small amount of the cryptocurrency when every block is created, there is an incentive to try to put as much computing power into this process.

However, as more miners enter and the computing power increases, blocks will be generated at a faster rate, causing new currency to enter the market at a quicker rate as well. As this interferes with the macro-economic goals of each currency, the requirement dynamically changes to limit the blocks being created to a specific time interval. Additionally, the amount paid to the miners for each block reduces over time to keep cryptocurrencies non-inflationary in nature. In all, this means the more miners there are and the longer the crypto has been a currency, the less profitable the process becomes (often this causes mining to become not profitable at all as electricity and computing power costs surmount crypto gained through mining). So, to overcome this smaller pay, miners say they will not include any transactions in there blockchains unless there is a small fee paid to them to make the mining process profitable again. Additionally, the large cumulative computing power used by miners uses a serious amount of electricity and power, which raises environmental concerns. For example, Bitcoin alone produces 36.95 megatons of carbon dioxide annually (comparable to New Zealand) due to its electricity use.

To overcome this a new idea was created called Proof of Stake. Proof of Stake is not drastically different from Proof of Work; however, a key difference allows it to overcome the aforementioned challenges. Proof of Stake allows miners who personally own larger sums of the currency, to have an easier specific hash requirement. This allows miners who mine with the goal of actually furthering the cryptocurrencies validity and who own much of the currency to have an advantage over those who mine just to flip their crypto earnings for a fiat currency profit. This both rewards more dedicated miners of the crypto community and also requires less processing power to achieve the hash requirements. This will hopefully drive the number of miners down as it will eliminate all miners who do not actually believe in the legitimacy of the cryptocurrency as they can no longer cash out their profits for fiat currencies. This will drive down the need for higher fees as mining will be more profitable for those who own much of the currency. Additionally, since less processing power is needed, electricity and power consumption will also drop proportionally which will help ease the many environmental concerns surrounding crypto mining espoused by many prominent figures such as Elon Musk.

Proof of Stake is a promising method that may help propel many cryptocurrencies into the spotlight and allow them to compete with fiat currencies in another aspect. However, only time will tell if this idea amounts to everything it promises as the above analysis is based off of theoretical application of the idea. Hopefully it will be one of the many innovations the crypto world comes up with to solve its many challenges.

For further reading on the topic:

https://www.investopedia.com/terms/p/proof-stake-pos.asp

-Robert Hughes