Many Like Proof of Stake Better Because it Solves Lots of Issues

1) Centralization

If you watched our overview video on Proof of Work VS Proof of Stake, you will remember we mentioned that Proof of Work blockchains give people who purchase powerful hardware devices a greater chance of winning the mining reward.

What this has resulted in is centralized organizations buying thousands of devices, known as ASIC’s, which generate the highest mining power. 

This type of operation is known as a ‘mining pool’ and it allows people to ‘pool’ their resources together to give them the greatest chance of solving the cryptographic sum first.

Consequently, just four mining pools control more than 50% of the total Bitcoin mining power.

Majority are located in China where electricity is cheap.

This is an unfair system as it means that the average person has no chance of ever winning the mining reward. 

This is where Proof of Stake is different. This model prevents groups of people joining forces to dominate the network just to make a profit. Instead, those who contribute to the network by freezing their coins are rewarded proportionately to the amount they have invested.

2) Electricity Consumption

Proof of Work blockchains like Bitcoin use large amounts of electricity. This is because the cryptographic sum that miners must solve is incredibly difficult.

A recent study found that the total amount of electricity required to keep the Bitcoin network functional is more than the amount used by more than 159 individual countries!

Not only is this bad for the environment, but it also slows down the rate at which cryptocurrencies can increase their real-world adoption. This is because electricity bills must be paid using fiat currency.

On the other hand, Proof of Stake does not need highly complex sums to be solved, meaning that the electricity costs to verify transactions are substantially lower.

3)  The great attack 

The great attack is when a group or single person gains more than 50% of the total mining power. If that happened in a Proof of Work blockchain like Bitcoin, it would allow the person to make changes to a particular block. If this person was a criminal, they could alter the block for their gain.

A recent example of a 51% attack happened against the Verge blockchain, which allowed the hacker to walk away with 35 million XVG coins. At the time of the attack, this amounted to a real-world value of $1.75 million!

When using a Proof of Stake consensus mechanism, it would not make financial sense to attempt to perform a 51% attack. 

For this to be achieved, someone would need to stake at least 51% of the total amount of cryptocurrency in circulation. The only way they could do this is to purchase the coins on the open market.

If they decided to buy an amount this substantial, then the real-world value of the coin would increase along the way. As a result, they would end up spending significantly more than they could gain from the attack. 

Not only this but once the rest of the network had realized what had happened, that person could lose all their stake. 

Disadvantages of the Proof of Stake Model?

There are some. 

Some people feel that Proof of Stake help the rich get richer. This is because the more coins you can afford to buy, the more coins you can stake and earn.

However, this is almost no different from the Proof of Work consensus mechanism, whereby wealthy miners can simply purchase thousands of ASIC devices.

Next is that it allows people to verify transactions on multiple chains, which Proof of Work doesn’t. The reason this could be an issue is that it might allow a hacker to perform a double-spend attack.

This is when somebody transfers funds to somebody else, but before the transaction is confirmed, they manage to spend the funds again. 

Under normal circumstances, such an attempt would be prevented when all of the other miners on the network see it. Furthermore, because Proof of Work only allows devices to mine on one chain, the dishonest chain would simply be rejected.

On the other hand, in a Proof of Stake model, it doesn’t cost forgers any money to mine on multiple chains, possibly allowing somebody to successfully perform a double-spend. Which is otherwise known as the “‘nothing at stake’ problem.

In reality, there is no consensus mechanism that satisfies everyone. 

The best one depends on you. 

If you haven’t checked our video dedicated to Proof of Work, check the description box. You will also find other topics that could further make your understand blockchain and cryptocurrencies. 

We suggest taking whatever you know to your financial advisor before executing any investment strategy.