Proof of Work vs Proof of State

A significant financial element of trading in NFTs is the gas fee charged on minting and transactions. The fees work their way through the cryptocurrency system and are used to finance the computers manipulating the Blockchain tokens.

Bitcoin and (originally) Ethereum use Proof of Work (POW) to ensure that nodes of data are valid and then to add these as blocks to the chain. The work itself requires considerable processing resources but the reward is blunted because many miners may be doing the same work but only one will finalise the work and receive the reward. The POW model needs to ensure that the rewards to miners are sufficient to justify their hosting of server farms and the power required to run them. As the computer resources and power demands are relatively high these trickle down into the fees paid by the Blockchain users.

Proof of Stake (POS) is cheaper to run so means lower fees for the users. It also benefits the Blockchains themselves as the technology barrier to setting up and running a mine is less. This should lead to more miners, greater redundancy and less reliance on high volume server farms. The reduced power consumption should also reduce the environmental impact of Blockchains which have caused objections to their use. POS involves miners putting down a stake of cryptocurrency to request to validate a node. The Blockchain will choose a single miner from amongst those with stakes to validate the node and add it to the chain. If the node is found to be invalid some of the stake is lost. The chance of being allocated a node to validate depends on the stake put forwards so miners can join staking pools, sharing some of the income from each validated transaction in the pool. The processing advantage is that the exact same work of validating the same data is not performed by many miners at the same time.

POS promises the advantage of lower fees and the reduction in environmental impact compared to POW is particularly attractive amongst the artistic community. Example implementations include Solana, Tezos and Flow. Solana together with Polygon are supported by the OpenSea platform.

On 15/9/22 Ethereum completed ‘the merge’ and moved from a POW to POS model []. The move is claimed to cut Ethereum’s energy requirements by 99.9% hopefully attracting investors who had previously been put off by the environmental costs of the chains high energy demands. The merge has not, however, led to a significant change in Ethereum gas fees. These fees can be tracked at ycharts and show the fees to be relatively consistent between late July and late September 2022.

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