The author of this article is stakingrewards.com, originally compiled by Cobo
This article has a total of 7268 words, and the estimated reading time is 18 minutes
In order to deeply understand Staking and PoS (Proof of Stake), in this article we will compare it with the current most mainstream consensus mechanism - PoW (Proof of Work).
At present, most public chains use PoW, but as PoS is getting more and more attention, it can be expected that the proportion of PoS will exceed PoW in the near future.
Almost all newly launched public chains are now based on PoS, and even the second largest public chain, Ethereum, will switch to PoS in the next major upgrade. Why is this? Is PoS really better than PoW?
PoS is indeed superior to PoW in some respects, and we will compare and analyze the two from several dimensions below.
1. Definition of PoS
First, lets explain the basic concepts.
| PoW and PoS are two different algorithms that determine consensus in a distributed network and how to reward consensus maintainers.
In other words, PoW and PoS explain how to issue new coins to provide incentives for the network and reward consensus maintainers who provide resources. The value of these coins is backed by resources (mining machines, ASIC chips or a certain amount of coins, etc.), and the premise of getting rewards is that you must take honest actions. This is true whether it is BTC, ETH, or XTZ.
You might say: providing or locking certain resources in the network while taking certain risks sounds a lot like Staking. Yes, indeed!
PoW can actually be understood with the logic of PoS. Spending money to buy mining equipment and electricity is equivalent to a form of Staking. We can further summarize that staking is a traditional form of economy - investing capital to earn a return.
Although this understanding is not wrong in some cases, we still return to the definitions of the two and their core differences.
The security of the PoW network comes from the hashing power. In theory, the greater the computing power, the higher the income. For details, please refer to Bitcoin miners and mining pools.
The security of PoS comes from the value of the mortgage economy. In theory, the higher the number of Staking, the higher the income. (The reason for saying theoretically", because the selection of Validator is random, so as to avoid over-centralization. )
Although every consensus protocol is different, there are some basic principles we can compare.
Next, we will compare PoW and PoS in terms of development trends, scalability, network security, decentralization, cost, governance, community participation, cold start, and environmental protection.
2. Development trend
Although PoS has a shorter history than PoW and a smaller share of the overall market, it is growing rapidly.
In fact, thirteen of the top thirty cryptocurrencies by market cap already use PoS or PoS-like, including EOS, Stellar, Tron, Dash, Neo, Binance Chain, Ontology, Tezos, NEM, VeChain, Waves, Qtum, Decred, Lisk, and three more (ETH, Cardano, and OmiseGO) are moving to PoS.
This also means that more than half of the top 30 coins in the market are using PoS. In addition, almost all second-layer solutions are using the staking mechanism. Even Bitcoins Lightning Network can be thought of as some form of PoS: some relay nodes stake Bitcoin to help users transact through channels and earn some fees from it.
Total Staking Market Cap: > $16B
Total value locked in staking: > $5 billion.
PoS market cap ratio: 9.80%
Except for BTC and ETH, PoS market cap ratio: 26.6%
(Source: Stakingrewards.com 29.04.2019)
These numbers continue to grow, and many expect the total value of PoS chains to reach $50 billion by the end of the year. With Binance Chain, Cosmos, and Polkadot moving various projects to the PoS blockchain protocol, and the launch of ETH 2.0, the total value of PoS chains may exceed this size.
Proof of Stake (PoS) seems to be slowly taking over the market.
3. Scalability
When talking about scalability, transaction throughput and transaction confirmation time must be considered.
Transaction throughput: The block time and block size limit the transaction throughput of the network. The block generation time of Bitcoin using the PoW mechanism is about ten minutes. Other currencies are shorter, and Ethereum can be reduced to fifteen seconds. The transaction throughput will also increase slightly with the reduction of the block generation time.
With the joint efforts of PoS consensus maintainers (such as Validator and block producers), the average transaction throughput is much higher than that of PoW due to the much shorter block generation time.
For example, Tezos has been able to achieve 40 transactions per second (40 TPS). EOS and TRON in DPoS (Delegated Proof of Stake) can even handle transactions exceeding 1000 TPS.
(Source: https://blocktivity.info/ )
Transaction confirmation time: Transaction confirmation time is also an important measure of blockchain scalability, especially in a business environment. In the PoS consensus mechanism, the transaction speed is faster, and even almost real-time confirmation in some scenarios.
4. Network Security
As we all know, Bitcoin started as the pioneer of PoW in 2009 and has been running stably for more than ten years. Many other digital currencies have also adopted the PoW consensus mechanism. Over the past ten years, PoW has become a public chain design template, which has been tested for reliability and security after many attacks.
In the short term, PoW may be threatened by mining monopoly, and the computing power can be increased by purchasing external equipment to launch a 51% attack. But for Bitcoin, it is almost impossible to purchase hash power to achieve this kind of attack, but for some small-scale PoW chains, like Verge and ETC, it is feasible.
If we want to estimate the cost of a 51% attack on Bitcoin, we start by considering hardware and electricity costs.
Total Hash Power: 50,000,000 TH/s
Antminer S9 current price: $300
Antminer S9 Hashrate: 13 TH/s
Hardware cost for 51% attack: $1,153,846,153 USD (~1.11% of network value)
PoS and Staking are still new things. Although coins like PeerCoin and Ardor have existed for a long time, Tezos, the first mainstream PoS chain, was not launched until the summer of 2018.
PoS coins havent been rigorously stress tested, so we dont know what kind of problems they might face.
The following is a list of possible attacks that PoS may face:
The long-range attack is that the attacker creates a long blockchain branch starting from the genesis block, and tries to replace the current legal main chain. There may be transactions and blocks different from the main chain on this branch, so this attack is also called a replacement history attack or a history overwrite attack.
Nothing at Stake Attack
There are also harmless attacks on PoS networks. Unlike PoW, the cost of running multiple chains in PoS is very low, and the Validator can vote for multiple chains without suffering any loss, which violates the consensus protocol.
51% Attack51% Attack
You might think that you need to hold 51% of the total coins to launch a 51% attack, but in some PoS networks, you only need a minimum of 33% stake funds to launch such an attack.
And if other peoples votes can be absorbed, the attackers dont even need to use their own coins to launch the attack, they can even obtain votes by purchasing or bribing them.
Another point is that the 33% I mentioned is not 33% of the total supply of the PoS coin, but 33% of the Staking pool. In this way, the amount of coins required to launch a 51% attack will be less.
Low Staking Participation Rate Low Staking Participation
As mentioned above, in some PoS networks, it only needs to pledge 33% of the coins active in the fund pool to launch a 51% attack. For example, the stake rate is 25%, 33%* 25%=1/12, that is, only 1/12 of the total supply of the PoS coin is needed to launch an attack.
Private Key Attack Private Key Attack
Once the private key is obtained online, the attacker will obtain the ownership of the Staking funds and the right to sign transactions. Even if the private key does not directly control all staking funds, obtaining the private key will give you the power of Validation and Staking, which is convenient for attacking.
Therefore, a big security risk in the PoS network exists in the process of transferring the network value (stake) to the Validator, which may lead to high centralization and network attacks during this period. As long as there are a lot of resources, it is possible to launch an attack through buying votes or a validator monopoly.
A similar situation is happening with LISK, and Validator has set up several organizations to manipulate incentive shares. The Validator of EOS also formulated the EOS constitution, stipulating that voters cannot receive any rewards.
Please pay attention to the several attacks mentioned above. Some PoS may be designed to prevent these attacks at the beginning of the design, but PoS has not yet experienced actual stress testing.
Hybrid consensus mechanisms like Elastos have also begun to emerge. For security reasons, it uses Bitcoin as the parent chain in mining, and at the same time has a DPoS consensus algorithm similar to EOS. Such a hybrid consensus mechanism is also worth exploring.
5. Decentralization
PoW
PoW mining relies on machinery and equipment, which have a high threshold, and the technology is monopolized by a few companies.
Mining is also a difficult project, because buying ASIC chips is a long-term investment and not as liquid as PoS funds.
Moreover, the profit of mining is very low now, and only those large enterprises with hardware technology and cheap electricity can be profitable.
PoS
Unlike PoW, the core of the PoS consensus mechanism is the coins in the network. These coins can be purchased in large quantities on exchanges or even in the OTC market, and do not need to be obtained through mining, so there is almost no threshold for participating in Staking. In the PoS consensus mechanism, super nodes can be rewarded by running and maintaining the network, so the incentive to run nodes is high.
Although not everyone is willing or able to run a node, the staking mechanism is important for decentralization because PoS allows all token holders to vote and participate in consensus without running a node.
But do you think that under the PoS consensus mechanism, the rich will stay rich? Compared with PoW, it is actually not the case. In the PoW consensus mechanism, the law of the rich keep getting rich is more obvious. Rich miners can buy a lot of ASIC mining machines. They have resource advantages and enjoy high returns. Large miners in PoW enjoy returns under economies of scale; but for PoS Stakers, there are only linear returns.
(Source: 3IQ Research Group)
6. Cost
When discussing cost, we have to consider three aspects:
On-chain transaction costs
The cost of capital required to maintain the blockchain
Inflation costs required to compensate Validators or miners
Storing data on the public chain is extremely expensive, and every byte needs to be transmitted to and stored by every node in the blockchain network.
In the PoW consensus, the transaction cost of Bitcoin is about $1.91 per transaction, and the transaction cost of Ethereum is about $0.1 per transaction, and the transaction cost will change with the rise and fall of the currency price. At some point during the bull market highs, Bitcoin and Ethereum transaction fees can reach as high as $54.9 and $5.5, respectively.
In the PoS consensus, transaction fees are much lower. Taking Tezos as an example, each transaction fee is only about $0.01, and other PoS coins like Cosmos are similar.
Now, lets look at the cost of maintaining a blockchain.
The cost of maintaining a blockchain
PoW requires high hardware and electricity costs, while in PoS, becoming a Validator only requires a safe well-running device with very little electricity cost.
In the Bitcoin network, the annual hardware maintenance cost is about 2 billion U.S. dollars (the life of these hardware is about 18 months), and the electricity cost is about 4 billion U.S. dollars (electricity is calculated at 0.08 U.S. dollars per kilowatt).
That is to say, for the normal operation of the PoW network, 6.5% of the total value of the network needs to be invested. In a PoS network, maintenance costs only account for 0.1% of the total value of the network.
inflation cost
In a PoS network, the inflation rate is about 6%, while in a PoW network, it is about 4% (just an estimate).
The incentive design of the blockchain will reduce inflation over time. PoW has existed for a longer time than PoS, so we can say that the inflation level of the two is similar, and the inflation rate of PoS will become more and more in the future. Low.
In the PoW network, those investors who are not miners do not have a good way to resist inflation, while in the PoS network, currency holders can obtain a certain amount of income through coins.
7. Governance
In a PoW network, protocol governance can be divided into several parties:
Miners: decide whether the transaction information is confirmed and which chain to mine
Users: Decide which protocol to accept and which ecology to use
Foundation: decides how to allocate funds among different development organizations
Node: Decide which software to run and provide services to users through API
In the PoW network, it is difficult to say who holds the largest voting rights, because the voting rights in PoW are difficult to quantify. However, in order to maintain the network and manage the vast resources and network, there still needs to be a consensus among all parties. The lack of transparency in governance in PoW networks slows down the protocol design and upgrade process.
PoS governance is also distributed among the groups mentioned above, but the governance mechanism is more systematic, and we can abide by a simple rule - 1:1 voting.
Moreover, in the PoS network, we can implement on-chain governance (in fact, the PoW network can also be implemented, but there is no attempt at present). On-chain governance allows us to create protocols or suggest improvements to protocols, as well as vote on-chain. Based on the results of on-chain voting, the agreement can be executed automatically. Tezos is currently adopting this kind of on-chain governance mechanism.
Other PoS examples of governance voting include:
EOS
Decred
Dash
Cosmos
The clear and transparent voting design in PoS governance facilitates rapid implementation of protocol changes.
8. Community participation
PoW miners have traditional business thinking, and they are more willing to invest in a traditional business model they are familiar with. For them, mining is akin to factory manufacturing. Mining equipment is production equipment, and the more advanced the technology, the higher the efficiency. Cheap electricity is a necessary resource for the mining industry. These business models rely on market prices for the same reasons as traditional factories rely on steel prices.
There is of course a risk in this: if the price of the digital currency falls, mining may become unprofitable. But in most cases, it is also possible to make money by selling all coins at the market price.
Most of todays miners are people with certain resources in mining equipment and electricity, and they have little motivation to participate in the community. If they really believe in the value of the coin, direct investment can pay off handsomely. The return of direct investment in Bitcoin has now exceeded that of mining, and we do not think this trend will change in the long run.
In contrast, the Validator in PoS is more like an investor. They need to have a deep understanding of the technology behind the digital currency they hold, and at the same time contribute to the development of the protocol. Large PoS currencies generally have independent research teams.
In order to get more votes, these Validators generally need to hold a large number of coins. Through staking or providing staking services, these funds will be locked for a certain period of time. If they want to use some of the funds, they may not be able to continue to provide services to all customers.
In this way, Validator becomes a long-term investor, and they are more motivated to drive technology and value. The higher the incentive, the more invested.
Its like early-stage venture capital, where VCs back the companies they invest in. This metaphor vividly summarizes the mining investment theory and has been widely spread after Coinfund used it.
Nine, cold start
What is the best way to issue a public chain? Given the role tokens play in public chain adoption and funding, we must consider how the public will acquire tokens.
Issuing a PoW chain is very simple. Initially, the circulation of PoW is 0, and everyone obtains equal participation rights through mining. The process appears relatively simple, egalitarian, and transparent.
In order to provide support for continuous protocol research and development, a development fund can also be set up like Zcash, and a small part of block rewards is directly awarded to developers.
The cold start (Bootstrapping) of the PoS network is more complicated. From the beginning, multiple parties need to hold a part of the equity, and the ICO ratio is determined before the issuance.
The most common method is a token offering (be it an ICO, IEO, or something else), where the original token supply is sold or distributed to investors, developer teams, foundations, councils, etc.
Because large investors who participate in the original equity distribution have high barriers to entry and can also get rich returns, this kind of token issuance is generally not fair, and there are more restrictions on ordinary investors in the community.
Token vesting periods are often opaque and often come and go. It also means that investors may be diluted, but still kept in the dark.
Another method of issuing tokens is an airdrop, where people receive a certain amount of tokens without having to invest directly. This kind of token airdrop usually happens without the recipients knowledge, and the amount is extremely small, which is almost negligible compared to the total amount. This also doesnt seem like the best approach due to the lack of transparency.
In addition, there are other cold start methods, but they are still in the early stage, and it is difficult to draw conclusions now. One of them is a concept similar to cross-chain airdrop introduced by Cosmos, which is realized through a hard spoon - by copying the digital currency account balance on a PoW or PoS chain to a new PoS chain, this The new digital currency on the chain is interoperable and can be used for staking.
Hard Spoon: A new chain is formed based on the state of an existing blockchain network; the new chain does not compete with the original chain, but provides broader access. Tendermint founder Jae KwonJae Kwon
10. Environmental protection
If we look at the cost of securing a public chain, PoW is much more expensive than PoS, after all, the cost of equipment and electricity is high. From this perspective, PoW is obviously not friendly to the environment.
in conclusion
in conclusion
In this article, we compare PoW and PoS from several dimensions. Both are not perfect, and there will be no situation where a consensus mechanism will unify the world in the future.
We strongly believe that eventually at least one PoW chain will exist, and it will most likely be Bitcoin. PoW chains provide unparalleled security and irrevocability, and can serve as a global settlement layer and a source of truth data. Around Bitcoin, people have placed many visions, but there are also many controversies.
More and more new blockchain protocols are beginning to adopt the PoS security model, and as Ethereum gradually shifts from PoW to PoS, the proportion of PoS will also increase significantly.
Most of the second-layer solutions also adopt PoS, driving the topic of Staking to become hot in the blockchain world.
If we look at interactive and application-oriented PoS chains like Cosmos and Polkadot, we will find that PoS will even be associated with some PoW chains like Bitcoin, Monero, and Zcash. These PoW chains need to have their own Zones, Parachains and Bridges or communicate with them to indirectly become a part of the Staking economy.
To sum up, the reasons for the rise of PoS are:
Can earn Staking income without being diluted by inflation
Low threshold access to participate in the consensus
More scalable
No economies of scale, more decentralized
It is cheaper to maintain the blockchain
1:1 voting, more transparent governance
Higher incentives for consensus maintainers (such as Validator) and the community
more environmentally friendly
It is worth mentioning that the advantages mentioned above have certain costs and costs. PoS currently does not have traceable historical data like PoW. In the future, as the overall market matures, we will see that the development trajectory of PoW and PoS will become more and more complete, and it will be easier for us to learn. Of course, there will not be a situation where one chain dominates the world, just like there will not be only one algorithm. PoS+PoW hybrid systems like Decred may become more and more popular, but this is another topic.
(This article was originally compiled by Cobo, and the article does not represent Cobos point of view)
