Proof of Work or Proof of Stake? How About Both?
The debate between proof of work(PoW) and proof of stage(PoS) consensus models have been front and center on the cryptocurrency market for the last few years. The debate has been even more visible recently with all the controversy surrounding Ethereum’s performance issues and the uber-anticipated released of Casper. The PoW vs. PoS debate have rapidly contributed to improve the innovation in terms consensus protocols in distributed ledger architectures. While both sides of the debate have mostly driven by purist that passionately evangelize the advantages of one approach vs. the other, there is a third emergent trend in the crypto community that has been advocating for a Solomonic solution: combining PoW and PoS in a single governance-consensus model.
The Tragedy of the Commons vs. Nothing at Stake Problem
A lot has been written about PoW vs. PoS so I don’t plan to bore you repeating the same arguments. A good way to generalize the PoW vs. PoS argument is think about it as the friction between two major economic dilemmas: “the tragedy of the commons” and the “nothing at stake challenges”.
In PoW systems, miners are compensated for solving computational puzzles in the network. Miners aren’t able to cheat the system because it takes real-world resources to work out these solutions.
As a PoW network grows, the cost of mining will become significantly less lucrative when the block reward subsidy becomes negligible, and the reward consists (almost) entirely of transaction fees. The rationale behind this stems from an economic phenomenon known as the “Tragedy of the Commons”, which is a prevalent problem in the study of economics and game theory. In its most purist form, the tragedy of the commons describes a system in which participants have an opportunity to act selfishly, taking action to benefit themselves at the cost of harming their peers. A selfish rational agent will always take such action because she is interested only in her own well-being; but if everyone acts selfishly, everyone will be worse off than if everyone cooperates.
How is this relevant to PoW? Well, in a PoW network, rational miners will be encouraged to only process transactions that pay a high-fee so the cost of transaction can be manipulated by a small group of miners. What is even worse, miners can compromise the security of the entire PoW network by not validating transactions in order to avoid the computation fees.
In a Proof-of-Stake system, the coin holders get paid transaction fees for validating transactions. Therefore, Proof-of-Stake creates a clear and unambiguous economic incentive to hold coins for the long term. Proof of Stake isn’t about mining, it’s about validating, it happens by a miner putting up a stake, or locking up an amount of their coins, to verify a block of transactions. Each validator owns some stake in the network, that they bond. Bonding stake means you keep you coins in the network, and in some sense use it as collateral to vouch for a block.
PoS systems suffer from another economic challenge known as the “Nothing at Stake” problem. In a PoS network, there are only rewards, and no penalties, for validating transactions. As a result, participants in a transaction can start producing blocks on top of each other in a way that causes the network to never reach consensus.
Decred and the Emergence of Hybrid Consensus
A new wave of consensus models have been created to take advantage of the benefits of both PoW and PoS systems. Arguably, Dash is the most active cryptocurrency that uses a hybrid PoW-PoS approach. Another project that I like a lot in this space is Decred, which combines the benefits of PoW and PoS in a very clever lottery system.
In the Decredworld, a transaction is first processed by PoW miners which create the blocks in the blockchain. After that, the stakeholders will use a PoS model to confirm if the block is indeed valid. They do so by buying voting tickets in a lottery system. Decred’s mantra can be summarized as “mining the transaction is hard but validating it is easy”.
Just like Decred, there are many other projects that are starting to combine the benefits of PoW and PoS systems. As blockchain evolves, it is likely that these hybrid models will find a way into mainstream applications that can benefit from the robustness of PoW architectures and the flexibility of PoS models.