Consensus mechanism selection in Web 3.0 blockchain platforms: Proof of Work vs. Proof of Stake

Web 3.0 leverages blockchain technology to build trustless and transparent systems, ensuring that data and transactions are recorded on decentralized ledgers. Consensus mechanisms such as Proof of Work (PoW) and Proof of Stake (PoS) are crucial for maintaining the decentralized and secure nature of blockchain networks, ensuring that all transactions are verified and consistent across the network. This is vital for preserving the integrity and reliability of Web 3.0 applications. This paper investigates the decision-making process involved in selecting between these two mechanisms. We find that platforms are more inclined to adopt a PoW-based system when mining costs are relatively low, indicating a strong correlation between cost efficiency and consensus choice. Furthermore, our analysis reveals that the optimal token reward from mining in a PoW platform and the token reward rate per validator in a PoS platform exhibit non-monotonic changes, suggesting complex interactions among various influencing factors. Notably, we identify two win-win scenarios where the system achieves both increased profitability and enhanced social welfare. Specifically, the PoW platform demonstrates superior performance in profit and social welfare when penalties for data processing capacity shortages are sufficiently high. Conversely, when these penalties are low, the PoS platform shows greater effectiveness in achieving both profit and social welfare. These findings provide valuable insights into the strategic considerations underlying the choice of consensus mechanisms in blockchain applications.