Proof-of-Stake Works because Proof-of-Work Worked?
The two may seem like a subtle distinction, but it is important to understand the difference between the underlying technologies of PoW and PoS. Proof-of-Stake (PoS) and Proof-of-Work (PoW) are not substitutes, in fact, they do not even complement each other. They are two fundamentally different things, and should not be compared or contrasted.
Proof-of-work consumes energy in order to demonstrate that the network provides equitable settlement guarantees on a global scale without relying on network owners who might readily centralize over time. It is critical for a network to separate transaction processing incentives and ownership obligations on a technology that aspires to be a non-sovereign substitute for currency.
It is important to note that there is nothing wrong with PoW. It was an incredible innovation in its time. Without it, we would not have Bitcoin or Ethereum today. It made crypto possible by enabling trustless consensus, where nodes can agree on a set of data without requiring any trust in each other to do so.
However, there are important limitations to PoW. The most obvious one is the cost of running PoW systems. If you want to run a blockchain node, you need specialized hardware and a lot of electricity. That is why it makes sense for large organizations to run blockchains as they can afford to run mining farms and pay for the electricity bills from them.
The fundamental issue with Bitcoin’s Proof-of-Work (PoW) consensus algorithm has been that it is extremely wasteful. It is estimated that the Bitcoin network alone consumes upwards of $1B annually in electricity costs to maintain the security of its underlying blockchain.
In order to solve this problem, many alternative protocols have emerged, one of which is a protocol for reaching consensus called Proof-of-Stake (PoS). There are many variants of PoS but they all share the same principle: instead of requiring miners to waste resources proving their commitment to the network, validators show their commitment by staking a form of value (usually native tokens) in order to become eligible to participate in the validation process and receive rewards for doing so. This reduces the cost associated with maintaining a secure network, especially in comparison to inefficient PoW models, which is why this alternative consensus mechanism has been gaining popularity.
However, proof-of-stake networks which use token holders as collective governing bodies have their own centralization, which is not the goal of blockchain as it could lead to censorship and compulsion. You wouldn’t want a monetary system in which Elon Musk owned a substantial portion of the money supply and a significant vote on whether economic operations were legal on that underlying network and a significant claim on the fees as well as the seigniorage created by that network. There is much too much power when somebody owns one-half of all transactions.
True decentralization of PoS can come from the thousands of compatible PoS blockchains which has to be created to provide their own distinct token incentives, emission schedules, governance rules, target applications, and so forth, over the long term.
The success of proof-of-work prepared the door for proof-of-stake to be treated seriously.
Will PoS eventually replace PoW as the superior security approach? We really can’t tell as of this moment as this is still in its infancy compared to the proven and tested Pow.
PoW was the first, and most likely still is the greatest, in terms of stateless currency application.