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.
As the name suggests, POW relies on the ability of a decentralized network nodes (participants) to prove that a certain transaction between two parties (peers) valid and recorded on an immutable blockchain ledger. A computer node is used to solve a mathematical equation, the network of bitcoin mining nodes in the network race to solve a cryptographic equation that when solved provides proof that the transaction submitted for verification in that block are in fact valid. Upon a successful validation, a new block on the chain is added and the bitcoin miner who provided the verification is rewarded with new Bitcoin which is then added to the total supply. This process is called “mining,” the solvers are called “miners,” and their collective efforts is what keeps the POW blockchain secure.
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. Specialized computer hardware known as ASIC miners are deployed to validate the next block on the blockchain. Although this resource intensive process may attract attention from people who seek to criticize the use of energy, most fail to realize source of the resources. Not to mention the ultimate value of cryptographically securing the public blockchain ledger.
The ESG debate is mainly focused on the big "E" Energy as opposed to S & G which stand for Social and Governance. Bitcoin miners that are on a mission to argue in support of POW as the leading consensus protocol have taken to arguing that the source of their energy consumption is not at the expense of the communities they operate near. In truth the result of Bitcoin mining actually strengthens the grid due to the incentivization of energy production. It supports the people who need electricity and miners as buyers of last resort. Bitcoin strengthens the grid due to the incentivization of energy production especially renewable energy.
The POW consensus protocol creates an opportunity for certain bitcoin miners to gain dominance over the network. As recently as 2019, China accounted for over 70% of global hashrate in the bitcoin network thereby running the risk of a 51% attack to the network. A 51% attack is an attack on a blockchain by a group of miners who control more than 50% of the network's mining hashrate. Attackers with majority network control can interrupt the recording of new blocks by preventing other miners from completing blocks.
In spite of its drawbacks, POW continues to demonstrate its resilience, versatility, and security. Bitcoin continues to boast its 99.8% uptime which speaks volumes about POWs reliability as a consensus mechanism that we can rely on.
Proof-of-Stake (POS) was developed in response to the limitations to increase the transaction speed (TPS) of the Proof-of-Work model. Instead of work, this model relies on the verifiable existence of a stake in the ecosystem. A user simply needs to prove that they hold a certain number of cryptocurrency tokens in escrow to verify transactions on the network.
Ethereum (ETH) has shifted to the POS consensus model. 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. For some the commitment is onerous, however, it is not for unjust reason. One of the core tenets that acts as the glue holding the system together is the concept of 'skin in the game'. When your own collateral is at risk, the probability of malicious intent or negligence drops dramatically.
Traditional proof-of-stake networks encourage the centralization of power by offering considerable influence to the largest stakers. Early adopters, investors with sizeable positions, and institutions by proxy could collude together and push for 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.
POS is also a relatively new method of validating a transaction on the blockchain. In comparison, POW 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 (DeFi) is a system of value without gatekeepers. A network that is not controlled by governments, corporations or regulators, but rather based on pure math. The different decentralized consensus protocols have secured their networks based on different cryptographic proofs. There is no limit to the innovation in the future of cryptography and understanding of the mathematics that underpin the technology.
Smart Contracts are rapidly becoming an integral feature of POS protocols. The feature enables consummation of non-financial agreements between two parties as well as execution of a predefined contract's parameters.
POS also offers developers and creators alike the ability to create Non-Fungible Tokens (NFT). The feature revolutionizes how content creators can be compensated for their talents and how consumers can establish absolute proof of ownership without the need for establishing the provenance of the work. NFTs also provide content creators the ability to build in a royalty system which compensates the creator indefinitely upon the NFTs transfer from one party to another. Royalties offer a way to incentivise creators to continue their investment by compensating them for their effort past the initial sale.
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.
Miners such as Argo Blockchain present an elegant solution to POWs 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.