The oldest and most popular framework for decentralized networks is “Proof-of-Work.” Originally developed in 1993, the Proof of Work consensus mechanism was first popularized when it was used to launch Bitcoin. The system has stood the test of time. Over Bitcoin’s 12-year history, the core blockchain has never failed. This track-record is a testament to the enduring appeal of the PoW model.
As the name suggests, PoW relies on the ability of network users to prove that a certain task or work was completed. In this case, the task is computational. A computer node is used to solve a mathematical equation. Once the equation is solved, a new block on the chain is verified and a freshly minted BTC token is awarded to the solver. This process is called “mining,” the solvers are called “miners,” and their collective efforts are what secure the Bitcoin blockchain for all parties involved.
Computational work is easy to do, easy to permanently record, and easy to verify. This is probably why Bitcoin’s network has survived for well over a decade. However, the model does have some downsides.
Proof of work is highly energy-intensive. Vast server farms with immense power are needed to mine any commercially viable amount of BTC. This is also the main reason why there has been a shift for companies to mine sustainably using renewable energy sources such as hydro, wind, and solar.
The PoW model also creates an opportunity for miners to gain dominance over the network which presented a real risk when China, as recently as 2019, accounted for over 70% of global hash contribution. However, in spite of its drawbacks, PoW continues to demonstrate its resilience, versatility, and security all around the world.
Proof-of-Stake (PoS) was developed in response to the limitations of the Proof-of-Work model. Instead of work, this model relies on the verifiable existence of a stake in the ecosystem. In other words, a user simply needs to prove that they hold a certain number of cryptocurrency tokens to verify transactions on the crypto network.
Ethereum (ETH) has been in the process of shifting to this consensus model. Once the transition is complete, users will have to stake a minimum of 32 ETH to verify transactions on the Ethereum network and earn more ETH as a reward for their commitment.
The proof-of-stake network encourages the centralization of power by granting offering considerable influence to the largest stakers. Early adopters, investors with sizeable positions, and institutions by proxy could become a governing council of sorts and push updates to the protocol that insulate and increase their hold on power further. In the end, there is a risk that any cryptocurrency that is built on the foundation of proof-of-stake validation may one day be subject to a centralized group of the largest stakers thereby eliminating all the benefits of what makes Bitcoin and proof-of-work so powerful.
Proof-of-stake is also a relatively new method of validating a transaction on the blockchain. In comparison, proof-of-work has been used as part of the core protocol of Bitcoin's consensus mechanism since its inception. However, to be fair, in the scope of history and the tried and true double entry accounting system, both methods still need to develop a longer track record before being enshrined as a permanent fixture in the world of finance.
The core promise of decentralized finance is a system of value without gatekeepers. A network that is not controlled by governments, corporations or regulators, but rather based on pure math. However, different decentralized systems have developed their networks based on different mathematical proofs.
For investors, users, and developers, understanding the way these mathematical proofs are derived, and how this equation changes the behaviour of both network users and miners is absolutely critical.
Both methodologies for validating the blockchain will most likely be around for the foreseeable future considering Bitcoin uses PoW and ETH is in the process of shifting towards PoS. Both cryptocurrencies make up the lion's share of the total market capitalization of crypto assets in the market.
Finally, miners such as Argo Blockchain present an elegant solution to proof-of-work’s biggest drawbacks. By mining with renewable energy and expanding strategically in North America, miners like Argo could shift the balance of power on the Bitcoin blockchain away from major players making the network robust over the long run.
Argo Blockchain has also invested GBP1 million (US$1.4 million) in Pluto Digital Assets PLC, a crypto venture capital and technology company that connects Web 3.0 decentralised technologies to the global economy. The investment expands Argo’s operations to emerging assets based on the PoS mechanism.