No ‘Black and White’ Answer to the Proof-of-Work vs. Proof-of-Stake Question, Says Kraken

The proof-of-work versus proof-of-stake face-off does not need to be a fight to the death, a new report has suggested – and a more nuanced approach could pay off for crypto players now fretting about which side of the fence they should be on.

The claims were made in a report on PoW and PoS from the crypto exchange Kraken’s Kraken Intelligence unit, which noted that both types of blockchain consensus mechanisms come with considerable benefits and drawbacks.

PoW is now used by Bitcoin (BTC), while Ethereum (ETH) plans to switch to PoS this September.

The report’s authors noted that PoW and PoS are the crypto world’s two biggest Sybil resistance mechanisms. This means they protect blockchain networks against potential Sybil attacks like spam nodes and 51% attacks – as well as regulating the selection of block validators.

And the authors pointed out the importance of networks exhibiting Byzantine Fault Tolerance (BFT).

This latter concept comes from game theory, referring to the fact that decentralized parties can often struggle to achieve consensus without the help of a mutually trusted central party. It refers to a situation whereby a group of Byzantine-era generals must conduct a joint attack on an enemy position from a number of separate positions – but cannot directly communicate with each other during the process.

This theoretical problem for the Byzantine generals, the authors remarked, “highlights a common problem among distributed networks” – namely, “Can [the] independent participants of a distributed network form an agreement?”

BFT in PoS and PoW each involve “trade-offs” – and the “rivalry” between the two consensus mechanisms “confronts key questions of network security, sustainability, barriers to entry, and decentralization,” the Kraken Intelligence unit remarked.

The authors opined that PoW “generally offers better security and decentralization guarantees,” albeit at the cost of “scalability.”

“Conversely, PoS typically offers better scalability in exchange for security and decentralization,” they wrote.

As such, the unit’s reply to the great crypto question of our time – Is PoW or PoS better? – is “it depends.” The “best choice” of mechanism “ultimately depends on a given blockchain’s use case,” the authors remarked.

PoW helps blockchains “retain the ethos of cryptoassets,” namely decentralization and security, they said.

But for “use cases such as hard money,” they wrote, PoS is “likely less desirable” as these mechanisms allow for the “possibility of the wealthiest users gaining an overwhelming share” – which would compromise factors like decentralization.

However, when it comes to “mediums of exchange” and smart contracts, the authors opined that PoW is “potentially less desirable,” because network efficiency and scalability are “paramount if these types of blockchains are to resist long-term scaling issues.”

In essence, the authors painted a picture of a sliding scale with scalability at one end and decentralization at the other – and a consensus mechanism to match at each end. They explained:

“A highly scalable network is said to optimize scalability at the expense of decentralization and network security.”

The authors concluded that the choice between PoW and PoS was “not black and white” for blockchain networks.