PoS versus PoW

One of the significant benefits of Cardano is that it relies on Proof of Stake (PoS) to secure the chain rather than Proof of Work (PoW). Why is this a better method?

Elliot Hill from the Cardano Foundation recently explored the history of PoS versus PoW in an excellent forum post:

Consensus mechanisms are essential for all parties to agree on a single immutable history of a blockchain, to mint new blocks and to maintain the protocol as a whole. The two main methods of consensus used today are based on proof of work (PoW) or proof of stake (PoS) mechanisms, which have influenced many other types of similar consensus methods.

Bitcoin solves this problem of consensus via miners competing to solve a cryptographic challenge, the first one to do so gets to seal the block and extend the chain. The difficulty of the challenge is adjusted by the network to keep block production to approximately 10 minutes, and every 630,000 blocks the reward the miners receive is halved.

This was an excellent approach to bootstrap the cryptocurrency ecosystem from zero participants, however it comes with a significant downside as the network value increases; power input is proportional to overall value of the network. It will always make sense to add mining capacity as long as the cost of power plus mining kit is lower than the reward from mining. With bitcoin at $10k and rewards of 6.25 BTC per block that’s a lot of power being consumed, if BTC increases to a $100k as it may in the coming years the total power consumption of the Bitcoin network will be higher than many nation states.

There is another downside. As the entry cost to mine has increased over time; first via CPU, then GPU, followed by increasingly specialised ASICS the level of centralisation in the network has increased. There are now around 10 major mining operations for Bitcoin globally. This centralisation makes the network less representative as the miners exert disproportionate control over changes to the network.

For bitcoin, about 58% of transactions are processed by four mining pools, mostly in China. Some 57% of ether production is controlled by three mining pools. article

Cardano is a 3rd generation network (BTC = 1st Gen, ETH = 2nd Gen). In the next post we will explore the Cardano approach compared to BTC and ETH, how it solves these issues and the benefits.

As an aside we would encourage readers to spend some time to read Satoshi’s original white paper (if you haven’t already), which elegantly derives how a ‘A Peer-to-Peer Electronic Cash System‘ can be made secure without the need for a trusted 3rd party such as a central bank issuing a currency.