A Threat to Crypto-Miners? PoW vs. PoS.

Mining has been a contentious topic as of late, especially when discussing the environmental impacts crypto-mining has created. People unfamiliar with this topic are trying to break down what that environmental toll could be coming from. Simply, mining rigs require a lot of electricity. Consequently, as the mining difficulty increases, so does the cost to mine. This is especially true with cryptocurrencies like Bitcoin which uses what is called a Proof of Work (PoW) verification mechanism.

Proof of Work (PoW)

Here is a brief description of what Proof of Work is and how it functions. PoW is a protocol that deters certain cyber-attacks like a distributed denial-of-service (DDoS). The attributes that make it attractive with digital currencies like Bitcoin is the trust-less and consensus mechanisms. This means you do not require a centralized, third-party entity to verify a transaction. You can get rid of the banks and allow individuals to have more control over their funds and transactions. Each person running a node has an exact copy of the ledger, distributing the transaction information among a large number of individuals. The ledger is immutable, so nothing can be changed about previous transactions (except a 51% attack as described below).

When miners verify a transaction in a certain block is valid, they do so by using their respective computing power to optimize the solution. As you can see, as the hash difficulty becomes more complex and random, and as more miners enter thereby increasing competition, it will require more computing power to solve that problem. Consequently, as more computing power is required, so is more energy, all else given. This is why PoW systems have been under a lot of scrutiny as of late. Fortunately, new systems are being created — the most well known being Proof of Stake (PoS).

Proof of Stake (PoS)

Proof of Stake is a new way to verify transactions while maintaining the decentralized aspects that we all love with blockchain technologies. For PoS to work, you first need to print out all the possible coins for a specific currency. Deterministically, forgers will be chosen based on wealth to create a new block (hence the term stake). A forger, in this case, is the same as a miner. This is very different from the way a PoW system works when a miner needs to leverage his/her processing power to solve complex algorithms. This also eliminates the mining reward — the monetary incentive to become a miner in the first place!

Current Trends

At the end of the day, Proof of Work is still a much more dominant system in terms of cryptocurrencies utilizing its functionality. Along with the cost of energy raising for miners in a PoW configuration, there is also a threat called a “51% Attack”. This is when a large hacker decides to take up 51% of the total hash and re-write the ledger. This is an unrealistic attack due to the overwhelming costs associated with it (especially considering how decentralized an ecosystem like Bitcoin is). Proof of Stake doesn’t have this vulnerability, but much is still unknown if other weaknesses that exist.

It is common knowledge that Ethereum will eventually be implementing a PoS system called CASPER. The Ethereum community is fairly divided about this transition primarily due to the lack of mining incentives. Also, the rich get richer in this model. The individuals that have enough investment into the cryptocurrency to be a forger will continuously make more money than those that cannot. Although, this is not too dissimilar to wealthy miners always having a competitive advantage over average miners due to equipment differences.

In conclusion, Proof of Work isn’t going anywhere anytime soon, but it is a good sign to see new innovative ideas make way in the blockchain community. This is a healthy sign for a maturing industry.