Business & Innovation

Why “Proof of Stake” Blockchain Solutions Are Best for Businesses

09.03.20 | Alex Davis [SSB]

While the Proof of Work (PoW) consensus mechanism was implemented in the first successful blockchain, the system suffers from a myriad of issues when applying the technology for commercial business use. Designed specifically for business use cases, the next generation of blockchains called Proof of Stake (PoS) is now available and ready for deployment. But what is PoS, and why is it better for businesses than PoW?

In a Proof of Work system, computers (miners) seeking to validate transactions must first compete against one another in a race to solve a cryptographic puzzle. The first computer which solves the puzzle earns the right to validate the transaction for that block (hence the term Proof of Work), and earns a reward as compensation.

As time goes on, and more computers join the network, the cryptographic puzzle becomes more difficult, and one must add more computing power in order to compete.

So while PoW enables a secure network, there are many drawbacks as well. To begin, PoW is an energy intensive process, so much so that PoW blockchains consume more electricity than the country of Switzerland.

The increased need to compete with computing power leads miners to constantly spend money to upgrade their computers and group together their computing power in mining pools, leading to a more centralized network.

Right now, 70% of the largest PoW blockchain’s computing power is controlled by just 5 mining pools concentrated in China, a worrying thought considering that 51% is needed to attack the network.

Lastly, PoW is limited in its transaction speed, being able to process 7-15 transactions per second, a small amount when you think about how Visa processes 1,700 transactions per second.

So, what if I told you there was a way to have increased decentralization, no need to upgrade hardware, and faster transactions without the heavy electricity use?

Let’s take a dive into the next generation of blockchain consensus mechanisms called Proof of Stake.

To begin, the basic model of Proof of Stake relies on an algorithm to randomly choose the next validator, rather than wastefully expending resources in a competition. In order to become a validator, users deposit a “stake” of digital assets as a bond into the network, and the larger the stake is, the higher the probability their node will be chosen to validate transactions. The bond also works which acts as a security deposit against malicious behavior, by making sure the validator has “skin in the game”. This way, if a validator attempts to authorize a fraudulent transaction, they are penalized by losing their bond.

So why is Proof of Stake more advantageous for businesses?

Reduced Energy Consumption
While some Russian nuclear power plants are renting space to PoW mining farms, businesses that want to operate nodes on PoS systems will be able to do so for just pennies on the dollar. A computer wanting to validate transactions simply requires staying powered on & connected to the network, which means a dramatic cost savings. Leaving a MacBook Pro on 24/7 would only cost about $47 per month, without needing to set up a $50,000,000 wind farm in order to power the operation, as one PoW based company has done in Texas. For companies looking to build a blockchain based system, and run it’s own node to cover transaction costs, this is a huge savings towards their costs of goods sold (COGS). Businesses will even be able to market their PoS system as a green alternative to energy sapping PoW networks. Blockchain based carbon credits anyone?

Less Hardware Requirements & Maintenance
A PoS node only requires one computer rather than hundreds of machines currently needed for PoW. As the bond placement is digital rather than a physical expenditure, companies can set up just one computer to run a node rather than an entire warehouse full of computers. PoW nodes require hundreds if not thousands of specialized computers in order to remain cash flow positive, and the latest models are costing $1500 per machine. So rather than spending capital on upfront computer costs, businesses can put their capital towards increasing their bond or elsewhere.

Furthermore, if a company wants to expand their operation they just need to increase the size of their bond rather than spending thousands on extra hardware. The growing difficulty of PoW networks means businesses must spend capital on constantly upgrading to more powerful machines, which makes older machines obsolete & unprofitable. On PoS, companies can just increase the size of their bond if they want to increase their validating capability. The reverse is beneficial as well, if companies want to decrease their operation, they may do so without having to sell used computers on the secondhand market, but rather withdrawing a portion of their stake from the network.

Increased Decentralization & Security
As companies have less hardware requirements and annual maintenance costs, this lowers the barrier of entry for new validators to run a node. The net result is a more robust, secure, and decentralized, with one current PoS system currently running almost 500 nodes worldwide. This increased level of decentralization brings an added layer of security, by highly decreasing the probability in which a consortium or cartel may band together and wreak havoc on the network with a 51% attack. On a PoS network, a malicious attacker would need to own more than 51% of the funds of the network rather than controlling 51% of the computing power, making attacks a much more expensive venture.

Faster Transaction Times
Lastly, PoS allows for faster transaction rates by eliminating the wasted competition, and streamlining the validation process. PoS systems are running at more than 100 transactions per second (TPS) and can theoretically reach over 30,000 TPS, rather than 7-15 TPS with 10 minute block times on PoW. Imagine paying for a coffee on a PoW network, and having to wait 10 minutes for your payment confirmation. It is simply not practical for mainstream use. The ability to transact in real time allows for the creation of financial applications to thrive on PoS systems, such as digitized currency, private equity, and more.

So there you have it, not only is Proof of Stake more advantageous for businesses to utilize, but it is also more convenient for their clients and the environment. PoS offers a more energy efficient system that is more secure, highly decentralized, and offers near instant settlement times. If you’re a business looking to build on a blockchain network, then Proof of Stake is for you.