Proof of Work vs Proof of Stake, Which Has the More Profitable Projections?

Ever since cryptocurrencies came to existence via Bitcoin, the Proof-of-Work (PoW) mechanism has been the go-to for the major blockchains. Undercurrents have however been changing, with Proof-of-Stake (PoS) making its mark.

A Brief on How Both

Perhaps nothing highlights the battle more than Ethereum’s current shift from its PoW to the PoS consensus protocol. Many comparisons have been drawn between the two, from their operations, security and efficiency. But the article will focus on just one that should undoubtedly be attractive to investors as it looks at the bang for the bucks spent. Which has the better profitable projections? Read on to learn more

The Proof of Work protocol is what is synonymous with the term crypto mining. To validate a transaction, minors have to solve a difficult cryptographic puzzle by generating hash values. The target is to get the nonce, the specific hash needed with the correct number of trailing zeros.

Proof of Stake on the other hand works quite differently but with the same goal, to verify a transaction. To do so, each miner gets assigned a block to validate. They then have to allocate a specified portion of their crypto assets in a portion called staking, so they ought to be called validators by staking.  

To better compare the profitability projects of both protocols, it is better to view them from different perspectives. The miner, the investors and finally the blockchain development team.

To The Miner

PoW

A miner opting for PoW will look at the returns to investment in the following way. They will compare what they incurred setting up their mining infrastructure, and how much they spent to mine a coin vs what they make in return. The article will focus on the most popular blockchain with the protocol, Bitcoin.

The calculations are quite complicated and may cover the entire article with lots of jargon. Going by reliable sources, mining Bitcoin generates roughly $12 per day using an M20S mining machine. It factors in the cost of the mining machine, electricity as well as the mining reward and the February 2022 Bitcoin price.

PoS

Mining via PoS will also be based on its most popular blockchain, that being Ethereum’s Beacon chain had staked 9.4 million ETH by 1 December 2020. The blockchain plans to fully migrate to the consensus protocol sometime this year (2022).

A validator has to stake in 32 ETH first, with one ETH going for 2,792.12 in February. The total figure needed sums to about $89,300. The staking reward is set depending on the total amount of ETH staked, the range being between a 2% to an 18.1% annual yield. A 10% fee is applied on the stake reward, split among the node operators, insurance fund and DAO. That places the returns at between $4.4 to $39.7 per day.

Verdict

PoS profit projections offer a higher possible reward, but it similarly has a lower possible reward too. PoW offers a well-set flat rate average, though a more powerful ASIC offers more returns on investments. The more profitable option is dependent on what is the amount of crypto staked.

To Investors

PoW

PoW is quite unfair to investors in its blockchains. To begin with, there are no rewards they generate from mining activities. They have to seek mining machines and be miners.

The mining process presents a cost to investors, the most notable being Ethereum’s gas fees. It is the fee miners charge for verifying investors’ transactions. Bitcoin’s fee is set at about $1.34 currently. It is relevant here since it eats into investors’ profitability.

PoS 

Investors can opt to make a gain from staking activities as a means of generating passive income. It can be done by joining staking pools which also take part in validating transactions. 

The yields per amount staked stand at the same rates as those of miners. They are also exposed to similar fees as well as similar fluctuations depending on the total volume staked.

Transaction fees are also charged in blockchains that use the PoS protocol. They also offer a dent in investors’ profitability.

Verdict 

Both consensus protocols offer a form of the dent to investors’ profitability projections via transaction fees to miners. PoS however offers more than a reprieve to interested investors via staking pools’ rewards.

To the Blockchain Development Team

PoW

An often overlooked portion of profitability is as it pertains to the blockchain. It is assessed as per a blockchain’s attractiveness to new users by assessing the speed and cost of transactions and energy consumption.

PoW protocols are generally very power-hungry. Bitcoin mining activities gobble up as much electricity as Argentina. Transaction costs are also quite high and fluctuate considerably. The number of transactions per second falls on the lower side when compared to the other protocols. Such factors affect the blockchain’s ability to attract customers hence profitability.

PoS

While the PoS is not the best in efficiency in the industry, it provides a better comparative measure. In power generation, the movement of Ethereum from PoW to PoS is expected to reduce its energy demand by a mind-boggling 99%!

The migration is also meant to help Ethereum to scale and reach the long sort out 100,000 transactions per second mark. That’s a clear pointer to PoS’s faster speed. The improvements are aimed at aiding Ethereum to attract more users, boosting its coin price and thus profitability to the blockchain.

Verdict

To the blockchain development team, a PoS run system presents better profitability projections than running on a PoW protocol. It is perhaps the reason why Ethereum intends to make the migration.

Take Away

The profitability projections of both protocols differ when viewed by different players in the blockchain. To a miner, it may go either way depending on a host of factors. To both an investor and the blockchain development and maintenance team, PoS just about edges out PoW. That’s largely because it reduces their profitability by a smaller margin.

Profitability is however just one of the many crucial factors to consider when comparing two consensus protocols. So while it gives a good direction it should be used alongside factors like security, efficiency and many more when making the choice.