While thousands of cryptocurrencies now exist, it can be difficult to look beyond two of the oldest and most widely used: Bitcoin and Ethereum.
Between the two, they make up about 70% of the total market capitalization (market cap) of crypto. In general, they always have.
While price is only one aspect of why Bitcoin and Ethereum rightfully take the role of crypto top dogs, they couldn’t be more different.
Since September 2022, their differences became even more apparent when Ethereum completed its multi-year upgrade, ditching the Proof-of-Work (PoW) consensus mechanism for the Proof-of-Stake (PoS) consensus mechanism
Ever since talk of “the Flippening” leading up to the 2017 crypto bull run, there have been arguments as to why Bitcoin will never be replaced by Ethereum.
Proof-of-Work (PoW) and Proof-of-Stake (PoS) are both consensus algorithms used to validate transactions and add new blocks to a blockchain. The main difference between the two is how they validate transactions and create new blocks. PoS relies on crypto staking while PoW relies on solving complex computer problems called mining.
Most cryptocurrencies on the market use PoW or PoS, with some variations
The most famous PoW cryptocurrency is Bitcoin, while the main PoS asset is Ethereum.
In this article, we take the camp of Bitcoin, defined by its PoW consensus mechanism.
Proof-of-Work involves solving complex math puzzles using computational power. PoW is a consensus algorithm used in blockchain technology to ensure network integrity and avoid double spending in cryptocurrencies.
In PoW, miners compete to solve complex math puzzles.
The first miner to solve the puzzle will be rewarded with newly minted cryptocurrency and transaction fees.
PoW is considered very secure as it requires a significant amount of computing power to confirm transactions and create new blocks. This means that it is difficult for attackers to manipulate the blockchain.
PoW uses a hash function, which takes an input and produces a fixed size output. It’s a one-way function, meaning it’s impossible to invert the output to derive the input.
Since the blockchain is distributed among the nodes of the network, consensus must be reached on each block added to the chain.
Nodes that have been tampered with or maliciously attempt to subvert the blockchain will see their new blocks rejected by legitimate nodes, making it difficult for attackers to manipulate the data.
Nodes that do the work to validate blocks receive a reward for doing so. This encourages nodes to act in the best interest of the network and not undermine its security.
In general, PoW relies on a combination of cryptographic security measures and incentive tuning to maintain the integrity of the blockchain network.
In PoW, the miner who first solves the math problem is considered the valid block to be added to the blockchain. The effort and computing power required by miners to solve the problem ensures the security and fairness of the network.
PoW ensures a fair distribution of rewards among network participants. It rewards those who contribute computing power to the network as opposed to those who have more coins or money
Under PoW consensus, thousands of mining programs work on one block until the hash is resolved, then move onto the next block. With this structure, every miner has an equal chance to solve the problem and add a new block to the chain.
In theory, anyone can participate in mining using PoW, as long as they have the necessary hardware and software. This naturally makes PoW a fair consensus mechanism as every miner has an equal chance of solving the puzzle and earning the reward.
Since the idea behind PoW is to require computation to add a new block to the blockchain, a certain amount of computation has to be done to solve the math puzzle.
Forcing miners to do this work protects the blockchain from spam attacks as it becomes prohibitively expensive to spam the network with large numbers of transactions.
This is because each transaction requires a small amount of computation to be included in the next block.
To spam the network with a large number of transactions, an attacker would have to produce a huge amount of computation, which would be costly and time-consuming.
In addition, the PoW mechanism ensures that the blockchain is secure, because once a block has been added to the chain, it cannot be changed without redoing the calculations for all subsequent blocks. This makes it very difficult for an attacker to tamper with the blockchain, as they would have to redo the calculations for all blocks in the chain, which becomes more challenging as the chain grows.
The PoW mechanism provides powerful protection against spam attacks as it requires a significant amount of computation to add new transactions to the blockchain. This makes it expensive for attackers to spam the network and ensures that the blockchain remains secure and tamper-proof.
From a security standpoint, it’s hard to argue that there’s a more secure form of blockchain cryptography than Bitcoin’s PoW.
When we consider how resilient a decentralized network is to potential attacks, we can break it down into two main factors: how much it costs to attack the network and the network’s ability to respond to that attack.
For a PoW network, an attacker would need to collect 51% of the network’s total computing power. This is economically unfeasible today as that cost, in terms of specialized mining hardware and electricity, is beyond the financial means of most governments and corporations.
In fact, as the computing power of PoW increases over time, it becomes increasingly expensive to consider such an attack.
On the other hand, if this unlikely scenario of a 51% attack does happen, network recovery would require an incredible effort of reorganization from honest miners. Since a successful attack allows the attacker to censor all transactions, honest miners would not receive block rewards, depriving them of incentive to work, giving the attacker an even stronger hold on the computer majority.
To regain control, honest miners would have to work together, operating at temporary loss to coordinate and identify the attacker, censor their transactions, and make the entire network ignore the new chain, rendering it worthless.
This is a huge undertaking of social coordination and logistics cooperation.
Proof-of-Stake suggests recovery could be easier, and that’s the subject of a companion article: Is PoS better than PoW?