Today, Proof of Stake is by far the most well-known option for blockchain networks. However, with the variety out there, it can be a daunting task to understand its main concepts. Currently, it is unlikely that you will encounter it in its original form. However, all Proof of Stake models share the same important precepts. Understanding these similarities will help you make better decisions about the blockchain you use and how it works.
What Does Proof of Stake (POS) Mean?
The Proof of Stake consensus algorithm was born in 2011 on the Bitcoin talk forum. It was proposed as a response to the problems of Proof of Work. Both algorithms share the same purpose of achieving consensus on the blockchain, but the procedures they use are completely different. Instead of proving they have large computing resources, participants simply prove they have coins at stake.
How Does POS Work?
The Proof of Stake algorithm utilizes a pseudo-random selection process to choose validators from a group of nodes. The system employs a combination of factors, such as the age of the stake, an element of randomness, and the richness of the node.
In Proof of Stake systems, blocks are ‘forged’ rather than mined. However, the concept of ‘mining’ is still occasionally used. Most Proof of Stake cryptocurrencies are launched with a supply of ‘pre-forged’ coins to allow nodes to start immediately.
Users participating in the forging process must lock several coins into the network as their stake. The size of the stake determines the probability that a node will be chosen as the next validator: the higher the stake, the higher the probability. To avoid favoring only the richest nodes in the network, unique methods are used during the selection process. Randomized Block Selection and Coin Age Selection are the two most commonly used methods.
Randomized Block Selection
In the Randomized Block Selection system, validators are chosen by searching for nodes that combine the lowest hash value and the highest stake. Since the amount of stakes is public, other nodes can usually anticipate who the next forger will be.
Coin Age Selection
The Coin Age Selection system chooses nodes based on how long their tokens have been in play. The age of the coins is calculated by multiplying the number of days they have been in play by the number of coins.
If a node has forged a block, the age of its coins is reset to zero, and it must wait a certain amount of time before it can forge another block, which prevents nodes with large stakes from dominating the blockchain.
Transaction Validation
Each cryptocurrency that operates the Proof of Stake algorithm has its own set of methods and rules, combined in what it deems the best opportunity for both users and the network.
When a node is selected to forge the next block, it will verify whether the transactions in the block are valid. It will then sign the block and add it to the blockchain. As a reward, the node receives the block’s transaction fees, and in some blockchain networks, it can be rewarded with coins.
If a node wants to stop being a forger, its stake, along with the rewards earned, will be released after a certain period, giving the network time to verify that the node has not added fraudulent blocks to the blockchain.
Which Blockchains Use Proof of Stake?
The vast majority of blockchains created after Ethereum use Proof of Stake consensus mechanisms. Generally, each one is adapted to the needs of the network. A clear example today is Ethereum 2.0.
Benefits of Proof of Stake
Proof of Stake has many clear benefits over Proof of Work. For this reason, new blockchains almost always operate on Proof of Stake. Here are some of its advantages:
Adaptability
As the needs of users and blockchains change, so does Proof of Stake. This is evident when looking at the large number of adaptations available. The mechanism is versatile and can be easily adjusted to most blockchain use cases.
Decentralization
More users are incentivized to run nodes, as it is cheaper. This incentive and the randomization process also make the network more decentralized. While it is true that staking pools exist, the frequency with which a person forges a block with Proof of Stake is much higher, usually decreasing the need for these pools.
Energy Efficiency
Proof of Stake is much more energy efficient than Proof of Work. The cost of participation is based on the economic cost of staking coins, not on the computational cost of solving puzzles. This system allows for a considerable reduction in the energy needed to run the consensus mechanism.
Scalability
Because Proof of Stake does not require physical machines to generate consensus, it is more scalable. Large mining sites and power supplies are not required. Adding more validators to the network is more affordable, easier, and more convenient.
Security
Participation acts as a financial motivator to prevent the validator from processing fake transactions. If the network discovers a dishonest transaction, the validator will lose part of their stake and their right to participate in the future. Whenever the stake is higher than the reward, the validator will suffer a greater loss of coins than they would gain from fraudulent activities.
To effectively control the network and support fraudulent transactions, a node would need to have a majority stake, also known as a 51% attack. Depending on the value of a cryptocurrency, it may be virtually impossible to take control of the network, as it would require acquiring 51% of the circulating supply.
However, this can also be a disadvantage, which we will detail below.
Disadvantages of Proof of Stake
Although Proof of Stake has many advantages over Proof of Work, it also has some weaknesses:
Forking
In the standard Proof of Stake mechanism, no element prevents mining from both sides of a fork. With Proof of Work, mining both sides would lead to a waste of energy. With Proof of Stake, the expense is much less, which means that people can ‘stake’ on both sides of a fork.
Accessibility
To start staking, a supply of tokens native to the blockchain is required. This means purchasing the token through an exchange or other method. Depending on the amount required, you will likely need to make a considerable investment to start staking effectively.
In such a case, you can buy cheap mining equipment or even rent it. With such equipment, you can be part of a pool and start validating and making profits in a short time.
Up to 51% Attack
While Proof of Work is also susceptible to 51% attacks, these can be much easier with Proof of Stake. If the value of a token plummet or the blockchain has a low market capitalization, it can, in principle, be cheap to take over 50% of the tokens and control the network.
However, there is a wide variety of Proof of Stake mechanisms on different blockchains. Many differences are due to the specific mechanism used.
Conclusion
How transaction blocks are added to a network has evolved significantly since Bitcoin. It is no longer necessary to rely on computing power to create cryptographic consensus. The Proof of Stake system has multiple benefits, and history has proven that it delivers. Over time, Bitcoin will likely remain one of the few remaining Proof of Work networks. For now, all indications are that Proof of Stake is here to stay.
