Kraken report explores what’s superior — PoW or PoS

A study by Kraken took a deep dive into the Proof of Work (PoW) and Proof of Stake (PoS) mechanisms to discover neither was ‘better’ than the other, but each had unique characteristics that can bolster specific types of blockchain protocols.

The report examines PoW and PoS consensus mechanisms’ resistance abilities to the Sybil attacks.

Sybil attacks aim to control the whole network by manipulating multiple accounts, nodes, or computers. The most common Sybil attack in the crypto space is the 51% attack, where the attackers try to take over at least 51% of all nodes to control the whole network. As decentralization lies at the core of blockchains, resistance to Sybil attacks is crucial.

Both PoW and PoS mechanisms require nodes to invest in the network, so they’re convinced to run an honest and decentralized system.

According to the report, the PoW mechanism’s market dominance is 58%, while PoS’ is 12%. However, this doesn’t mean PoW is better than PoS.

Proof of Work

PoW mechanisms require computational power to solve mathematic problems to mine blocks. Miners invest hardware and electricity in their operations and are rewarded with block rewards when they mine an honest block.

Strengths

• Being the dominant consensus mechanism in the crypto sphere, PoW systems have been tested in practice far more than PoS mechanisms.
• PoW blockchains are especially resistant to 51% attacks since taking over more than half of the nodes would be too expensive. Attackers wouldn’t be able to earn enough to cover the electricity and hardware costs for taking over 51% of the nodes, so it’s often not worth the trouble.
• Manipulating governance protocol is also particularly hard in PoW mechanisms as well. As one node counts for one vote, it is difficult to force a network-wide consensus. This wouldn’t be possible in PoS networks, where the users with the largest staked amount may hold an upper hand in the governmental decisions.
• As PoW systems also discourage forking by design. As the PoW miners invest power into their mining operations, in the case of a fork, they wouldn’t risk mining for the forked chain, thinking that it may not hold up. In PoS systems, forking is considerably easy as PoS miners can easily stake for both the original chain and the fork chain to double their earnings.

Weaknesses

• PoW mechanisms rely heavily on power consumption, which raises concerns about its environmental impact. Also, miners are required to update their mining equipment continuously to keep producing at maximum efficiency.
• Small PoW networks become prone to 51% attacks because the cost of taking over more than half of the nodes would be affordable.
• As all nodes operate anonymously, detecting a malicious node or preventing it from participating in the chain becomes impossible.

Proof of Stake

PoS systems rely on locked-up coins to operate the network. Instead of consuming electricity and operating hardware, PoS miners participate in the network by staking coins. Each time, the network randomly chooses amongst actively staking nodes to verify the validity of transactions and produce the next block.

Strengths

• PoS network requires nearly no energy and is much more environmentally friendly than PoW networks. This is the main incentive behind Ethereum‘s recent merge with its Goerli testnet. As it doesn’t require computational power, PoS networks also relieve their miners from having to update their mining equipment.
• As PoS networks rely on staked coins, it is possible to cut malicious nodes off once identified. In addition to preventing them from participating in the chain again, the network can also confiscate their staked coins as a penalty, which is an incentive to mine honest blocks for the miners.
• The PoS systems eliminate the competition over mining blocks by choosing the block validators randomly, which increases efficiency.
• Overall, PoS networks are easy to participate in since they don’t require too much power or special hardware. This lowers the entry barriers, making PoS networks accessible to more.

Weaknesses

• PoS networks are a relatively new technology and have been tested much less than PoW networks. Certain PoS networks can be prone to attacks in the future.
• Nodes with the highest amount of staked coins can have the upper hand in governance votes. Therefore, PoS blockchains become more prone to centralization.
• Even though PoS networks generally lower the entry barriers, some PoS blockchains require large initial investments to become a node. This may retain the network from growing and turn it into a centralized blockchain.

PoS for scalability; PoW for decentralization and security

Considering the strengths and weaknesses of both protocols, the report concludes that neither is perfect against Sybil attacks. However, each offers different benefits to blockchains, which can be valuable depending on the chain’s purpose.

Based on their characteristics, PoW networks offer strong decentralization and security. It is more extensively tested, difficult to turn into a centralized network, and discourages constant forking. A PoW network would be much more desirable for use cases like hard money than a PoS one, as it won’t allow the richest to take over the network and provides more security.

PoS networks, on the other hand, are much more energy efficient and better solutions for networks that value scalability. The network attaches nodes randomly to accelerate the process, and honest nodes can block malicious ones out of the system. A PoS network would benefit use cases most, including smart contracts.