Work Versus Stake

Bitcoin and Ethereum: How Consensus Works (And Why It Matters)

Digital currencies like Bitcoin and Ethereum use different systems to agree on the one true record - proof of work turns electricity into ledger security, while proof of stake turns capital into security.

What consensus solves

Consensus is how distributed systems decide on a single sequence of transactions. Without an agreed ledger, multicurrency systems are vulnerable to "double spend" attacks, where the same coins are spent more than once. Consensus also makes it possible for untrusted participants to collaborate without central coordination.

A consensus mechanism is the rule system that decides which version of the ledger is accepted as the real one. Bitcoin leads the way with proof of work, while Ethereum recently adopted proof of stake. Each solution pays for security differently - in electricity versus bonded capital.

Proof of work: how Bitcoin keeps its books

Bitcoin's proof of work consensus makes block production expensive by requiring its miners to compete to find a cryptographic hash below a target. The Bitcoin network adjusts that difficulty every 2,016 blocks so that new blocks come out to around one every 10 minutes.

The chain with the most accumulated work has the most secured history, and participants consider that the valid chain. Prospective blocks get stamped by including some transactions and a cryptographic hash, before the miner includes the new block in the chain.

Bitcoin miners compete to create a new block by solving the cryptographic hash function. The difficulty of mining is adjusted automatically by the Bitcoin protocol. Every 2,016 blocks, approximately once every two weeks, the difficulty recalibrates to maintain an average time of 10 minutes per block.

Bitcoin keeps blocks coming approximately every 10 minutes, by having each block to include a cryptographic hash of transactions included in the block before a new block.

Bitcoin's consensus uses electricity as its security budget, which defenders say secures the blockchain. Detractors call proof of work wasteful and environmentally damaging.

Proof of stake: how Ethereum keeps its books

Proof of stake produces new blocks differently - instead of expending electricity, proof of stake uses bonded capital. Validators propose new blocks and become validators by "staking" 32 Ether, the native coin of the Ethereum network.

Ethereum's September 2022 "Merge" switch harnessed its computational power away from mining, with a stake concentration to prove fairness over hardware concentration. A consumption advantage would no longer confer an advantage in earning block rewards.

The merge transitioned Ethereum from its energy-intensive network to a Proof-of-Stake-based network. Proof of stake allows validating transactions that lock up ETH rather than mining Bitcoin. The Ethereum Merge transitioned the network from energy-intensive Proof of Work to the Proof-of-Staked-based network on September 15th, 2022.

At the Merge, validators preferentially made a filter which was sampling from the Beacon Chain rather than Ethereum miners. The probability of validator selection depends on total capital staked and the amount staked by each validator., which required coordination across multiple organizations including all core development teams, the Ethereum Foundation, the Client Teams, the Ethereum research community.

The Merge: what just happened

Ethereum's September 2022 "Merge" switched the network to proof of stake and did away with mining. Rather than looking for useful hashes as proof of work requires, post-Merge Ethereum makes validators post a cryptographic signature as proof of stake.

At 6:43 AM UTC on September 15, 2022, Ethereum went live on a post-merge protocol. The protocol specified that the merge transition would occur once the Ethereum mainnet reached a total difficulty of 58,750,000,000,000,000,000,000. This happened at 06:42:42 UTC, two and a half minutes before the actual execution.

Under normal network complexity, post-terminal total difficulty transition would happen after the first post-terminal total difficulty block. On September 15, 2022, at 6:43 AM UTC, the merge went live. The Ethereum Mainnet Merge announcement set the terminal total difficulty at 58,750,000,000,000,000,000,000.

A validator's chances of getting selected depends on the validator's staked ether versus the total stake, which explains staking risk.

What counts as security

Proof of stake replaces hardware expense with capital locked as stake, in turn moving security investment away from power into locked funds. Reducing number of hardware efficiencies allows locked coins to be slashed for most on-chain misconduct or prevents abuse.

In proof of stake, validators avoid double-signing conflicting blocks on competing forks of the blockchain (technically known as equivalent blocks), to avoid slashing. Ethereum protocol has rules to penalize validators on a provably-forked stake if the fork is deemed hostile. A validator that violates this rule can have its staked funds slashed.

Slashing is an anti-abuse mechanism by which misbehaving validators lose part of all their staked funds. Since slashing depends on staker's online availability and keen observation, software designers designed tools to offload the burden from participants.

Defenders of proof of stake argue that verifying stakes is less energy-intensive, thus more environmentally sustainable, than proof of work mining. Ethereum increases stake rewards by reducing power usage. Proof of stake also eliminates the risk of selfish-mining; only when a protocol enforces slashing. To get a stake, validators commit capital.

What you should remember

In digital currencies like Bitcoin and Ethereum, decentralized nodes reach consensus not through majority vote, but by expending resources to secure blocks - whether as electricity or locked capital. Proof of work, which is still used by Bitcoin, secures blocks by signing each with "work" that is expensive to replicate. Hardware competition keeps the Bitcoin public ledger secure.

Proof of stake, which Ethereum adopted in 2022, dispenses with mining altogether. In this security model, validators forgo blocks to assign rewards more to coin piles staked against a block. Securing proof of stake relies on slashing faults by proving through staked tokens, which reduces power usage.

Ultimately, keeping the blockchain secure is the essential task for currencies like Bitcoin and Ethereum. They rely on costly block security – electrical versus staked capital – that secures the ledger. If you're looking to understand how the Bitcoin and Ethereum networks work and how they secure their ledgers, understanding the differences between proof of work and proof of stake is key.