Proof-of-work and proof-of-stake have a lot of benefits to offer the community, and the discussion around these algorithms has dominated conversations in the cryptocurrency community. The use of staking will become more widespread this year on the protocol level with Ethereum 2.0’s expected arrival, along with the continued development of Cardano, Tezos and Algorand, ultimately changing the landscape of the future networks and blockchains. On the other side of the protocols is the mad rush for the hyper gains from decentralized finance projects that utilize high yield farming from loans, which will further the adoption of these staking protocols.
The difference between PoW and PoS
How are existing PoS projects handling staking and returns? Delegated proof-of-stake uses a fixed number of delegates that are selected to create blocks. These delegates are selected based on a voting system in which users are given a number of votes proportional to the number of tokens they own. Delegates, sometimes called witnesses, are tasked with consensus during the generation and validation of new blocks. Rewards are typically shared among those who voted.
In blockchain technology, solving the trilemma of security, scalability and decentralization has proven elusive. If we solve for the scalability issues of PoW, the network may not be truly decentralized, leading to the possibility of falling victim to bad players. If delegate nodes are known, denial-of-service attacks can be carried out. A lack of security could vaporize holdings at record speeds.
One novel approach is Algorand’s “pure proof-of-stake.” Algorand is a truly decentralized blockchain that has recently experienced a 30% market capitalization spike after its listing on Coinbase. It relies upon the statistically low number of malicious actors and a lottery of nodes to ensure fair voting. Algorand 2.0’s protocol solves the trilemma, as its staking mechanism enables high throughput capacity without sacrificing the security that derives from decentralization.
With bonded PoS, users lock up part of their stake in the hopes that they get a chance to select the next block on the chain, and voting power is proportional to the amount of stake locked up. There’s a security benefit to this because if users are dishonest, they forfeit their deposit and ability to participate in consensus. The downside is that users lose the ability to spend their stake if they want to participate in consensus. Meanwhile, Algorand consensus participants do not have to lock up their assets and are able to freely spend their stake when they please.
Ethereum 2.0
Ethereum has been working on a solution for its own scaling issues with Ethereum 2.0, and new platforms are trying to meet the need to scale effectively. Ethereum 2.0 has recently announced its final testnet before network launch.
Ethereum 2.0, aka “Serenity,” is an attempt to move away from a PoW consensus mechanism to a PoS consensus, with changes coming in stages — and timing subject to change. With phase 0, the Beacon Chain will implement proof-of-stake and manage the registry of validators, which will begin attesting blocks on Ethereum 2.0. There are concerns that there won’t be enough validators online to stake during this round, but it’s likely more a question of “when” rather than “if” — but for the beacon to launch its genesis block, at least 524,288 ETH must be staked on the network, divided among a minimum of 16,384 validators.
Meanwhile, Ethereum 1.0 will run in parallel. The networks are planned to merge at some later date, but during this first phase, Ethereum 2.0 will not be processing transactions or be able to host decentralized applications. The beacon chain will introduce the native crypto of this network: ETH2.0. The beacon chain will coordinate the PoW and PoS networks while communicating with shard chains and the Ethereum VM. Shard chains are subnetworks made of shards that enable increased scaling capabilities. In Phase 1, they will separate the Ethereum blockchain into 64 shard chains, as Ethereum is theoretically able to process 64 blocks simultaneously.
This paves the way for the merging of PoW chains and Ethereum 2.0 in Phase 1.5. Ethereum 1.0 becomes the first shard chain in the new PoS network with no break in the data or transaction history. PoW Ethereum becomes one of the PoS shards, integrated fully into the new chain.
Serenity Phase 2, eWASM, is named after the Ethereum Web Assembly that replaces the Ethereum Virtual Machine as the new virtual machine. During this stage, shard chains are no longer in testing mode, and their transactions should be able to scale across the entire network. Once the network is fully functional, transaction capability, DApp hosting and executing smart contracts are now possible, and the transition is complete.
In contrast, Algorand’s newer network has its current consensus mechanism ready now, and Algorand 2.0 developers can host DApps on a truly decentralized network today. Ethereum 2.0 won’t be fully operational for another two years, and by then, their changes could be out of date. There are other networks, of course.
Other PoS solutions
Tezos is a self-amending, open-source, multi-purpose platform for building DApps and smart contracts that use Liquid PoS — a version of delegated proof-of-stake — for consensus. Reference has been made to Tezos as the token with the power to unseat Ethereum. “Baking” is how blocks are produced and validated on the Tezos blockchain. Token holders can delegate their tokens to a bake but always retain ownership. Only the validator is punishable if there is a security fault.
While Tezos has improved upon Ethereum’s initial PoW system by solving some of the scalability issues, its network still lacks the security and decentralization necessary to make DeFi truly seamless. Bakers still hold a considerable amount of power over the network, whereas in the Algorand network, users’ influence is proportional to whatever their individual stake is.
Cardano is another PoS network, but there are no miners, just users who run nodes and stake the network’s native token (ADA). It recently announced the launch of its much anticipated Shelley upgrade. The Shelley Incentivezed Testnet allows ADA holders to test incentivization in a real-world context. It will also allow holders to earn real rewards by either delegating stake or running a stake pool. Its staking method is Ouroboros PoS and is made up of three epochs that are split into slots. In each slot, each party evaluates slot leadership. Leaders are selected using the Satoshi algorithm so the probability that a stakeholder will be chosen as a slot leader is proportional to the number of coins a stakeholder holds. One party can be selected as the slot leader for multiple slots, and the selected slot leader extends a chain by creating a block for their respective slot. While Ouroboros is a consensus mechanism that solves some of the issues presented by Ethereum’s blockchain, it fails to truly solve the trilemma.
Algorand, by comparison, uses a “pure proof-of-stake” consensus that creates a unique and random committee for block certification with no central authority, ensuring that bad players can never corrupt the network. In addition, the network is capable of 1,000 transactions per second and is easily able to scale to billions of transactions. Blocks are finalized in under five seconds with no forking potential, so all transactions are final. This increases the security of holding Algorand’s crypto, ALGO.
Algorand makes it easy for developers to run web applications on its network and quickly integrate with applications in common languages by supporting a range of popular software development kits. With Algorand 2.0, developers will be able to digitize any type of financial asset on Algorand’s Layer 1. This will feature a low cost to execute, universal interoperability of all assets issued on Algorand, atomic transfers, as well as faster execution.
In conclusion, debates on the quality of proof-of-stake and proof-of-work may not be the question we as an industry should be asking ourselves, but rather, whether there is a way to use the strengths of both networks to achieve greatness.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Sinjin David Jung is the managing director of International Blockchain Monetary Reserve. After extensive corporate and startup experience in fintech, gaming and infrastructure, Sinjin founded IBMR, the issuer of ARCC, for social impact and promoting financial inclusion through a decentralized economic system. His professional background includes being a former senior management consultant at PwC in Korea and a Korean government senior industry technology analyst.