Proof of Stake vs Proof of Work: How Blockchains Agree

In short: a public blockchain has no central referee, so it needs a rule for deciding which new block of transactions is valid. Proof of work (PoW) and proof of stake (PoS) are the two best-known rules.

Proof of work: security through effort

Bitcoin's original white paper describes the idea. Nodes compete to find a value that, when hashed, meets a difficulty target, which takes repeated trial and error. The paper says the longest chain is "proof of the sequence of events witnessed" and also proof that it came from the largest pool of CPU power. In other words, rewriting history would mean redoing all that work faster than everyone else. Bitcoin continues to use proof of work (general background).

Ethereum's documentation describes the same family of design and lists its trade-offs. On the plus side, it is neutral (you do not need to own the coin to start mining), it has a long track record, and it is relatively simple to implement. On the minus side, it uses a lot of energy, mining can require specialised equipment, and mining pools can concentrate power.

What about the energy?

Estimates for proof-of-work Ethereum varied widely. ethereum.org's mining page cites about 70 TWh a year in mid-2022 (Digiconomist, as of July 18, 2022), which is the high end. Its energy page lists a lower pre-Merge figure of 21 TWh.

After the switch to proof of stake, the Crypto Carbon Ratings Institute (CCRI) estimated the network's electricity use at about 0.0026 TWh a year, a cut of more than 99.988%. A Cambridge Centre for Alternative Finance study estimates about 7.87 GWh a year, more than 99.9% below the final pre-Merge level. All of these are third-party estimates, not measurements by the Ethereum Foundation, and ethereum.org notes that proof-of-work energy use changes from day to day.

Proof of stake: security through collateral

Under proof of stake, participants called validators lock up coins as a deposit. On Ethereum a validator deposits 32 ETH and runs three pieces of software. Validators are chosen pseudo-randomly to propose blocks and vote on them, rather than racing each other.

The deterrent is financial. If a validator behaves dishonestly, for example by proposing conflicting blocks, some or all of its stake can be destroyed ("slashed"). A block becomes "finalized" once votes representing at least two-thirds of all staked ETH support it, and reversing a finalized block would require an attacker to put at least one-third of the total staked supply at risk.

Ethereum switched from PoW to PoS in September 2022. ethereum.org lists PoS advantages including better energy efficiency, lower hardware barriers, and costlier attacks. It also lists drawbacks: PoS is younger and less battle-tested, and more complex to implement.

Side by side

Proof of work relies on computing power and electricity; proof of stake relies on staked coins. In PoW, miners compete to add blocks and a cheater wastes work; in PoS, validators are selected and a cheater can lose staked coins. The main criticisms are energy use and equipment costs for PoW, and relative youth and complexity for PoS.

Why it matters

Neither design is automatically "better" for every network. Each choice reflects different priorities around energy use, decentralisation and security. Both aim for the same goal: letting a decentralised network agree on transactions without trusting a single party. For how Ethereum is scaling on top of its proof-of-stake base, see What Are Layer-2 Rollups?

This article is educational and is not financial advice.

Sources

• Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System
• ethereum.org, Proof-of-work (PoW)
• ethereum.org, Proof-of-stake (PoS)
• ethereum.org, Ethereum energy consumption
• Cambridge Centre for Alternative Finance, Ethereum After the Merge: A Change in Power