Proof of Stake (PoS) is a consensus mechanism that serves as an alternative to Proof of Work (PoW). Unlike PoW, which requires substantial computing power, PoS validators must stake coins to validate transactions. This approach significantly reduces the energy consumption associated with blockchain networks. Additionally, PoS enhances decentralization, security, and scalability.
However, PoS can be less accessible for individuals without access to cryptocurrencies. Moreover, low market cap blockchains can be susceptible to a 51% attack, which can be relatively easy to execute. PoS is highly versatile, leading to various adaptations tailored to different blockchains and use cases.
Introduction PoS is currently the most popular choice for blockchain networks, but its numerous variations make it challenging to grasp its core concepts. While you’re unlikely to encounter the original form of PoS, understanding the fundamental similarities among different PoS implementations can help you make informed decisions about the blockchains you use and their operations.
What is Proof of Stake?
The concept of Proof of Stake was introduced in 2011 on the Bitcointalk forum as a solution to the problems associated with PoW. While both mechanisms aim to achieve consensus on the blockchain, they differ in their approach. Instead of providing computationally intensive proofs, participants in PoS only need to demonstrate that they have staked coins.
How does Proof of Stake work?
The Proof of Stake algorithm employs a pseudo-random election process to select validators from a group of nodes. This selection is determined based on factors such as staking age, randomization, and the node’s wealth.
In PoS systems, blocks are “forged” rather than mined, although the term “mined” is sometimes used interchangeably. Most PoS cryptocurrencies start with a supply of “pre-forged” coins, allowing nodes to begin forging immediately.
Participants in the forging process must lock a certain amount of coins into the network as their stake. The size of the stake determines a node’s chances of being selected as the next validator—the larger the stake, the higher the probability. Various methods are incorporated into the selection process to ensure that the network does not favor only the wealthiest nodes. The two commonly used methods are Randomized Block Selection and Coin Age Selection.
Randomized Block Selection In the Randomized Block Selection method, validators are chosen based on a combination of the lowest hash value and the highest stake. Since the sizes of stakes are public, other nodes can often predict the next forger.
Coin Age Selection The Coin Age Selection method selects nodes based on the length of time their tokens have been staked. Coin age is calculated by multiplying the number of days the coins have been staked by the number of coins staked.
Once a node has forged a block, its coin age is reset to zero, and it must wait for a certain period before it can forge another block. This mechanism prevents nodes with large stakes from dominating the blockchain.
Validating transactions Each cryptocurrency that utilizes a PoS algorithm has its own set of rules and methods for validating transactions, tailored to the network’s specific needs and user requirements.
When a node is chosen to forge the next block, it verifies the validity of the transactions in the block, signs the block, and adds it to the blockchain. As a reward, the node receives transaction fees from the block and, in some cases, a coin reward.
If a node wishes to stop being a validator, its stake and earned rewards are released after a certain period. This allows the network time to verify that no fraudulent blocks were added to the blockchain by that node.
Which blockchains use Proof of Stake?
Most blockchains after Ethereum have adopted Proof of Stake as their consensus mechanism. Typically, each blockchain modifies it to suit its specific needs. We will discuss these variations later in the article. Currently, Ethereum itself is transitioning to Proof of Stake with Ethereum 2.0.
The following blockchain networks use Proof of Stake or a variation of it:
- BNB Chain
- BNB Smart Chain
- Solana
- Avalanche
- Polkadot
Advantages of Proof of Stake:
Proof of Stake offers several clear advantages over Proof of Work, which is why most new blockchains opt for Proof of Stake. Its benefits include:
- Adaptability: Proof of Stake can be easily adapted to meet the changing needs of users and blockchains. There are numerous adaptations available, making it a versatile mechanism suitable for various blockchain use cases.
- Decentralization: Proof of Stake encourages more users to run nodes since it is more affordable compared to Proof of Work. The incentive structure and randomization process contribute to a more decentralized network. While staking pools do exist, there is a higher probability for an individual to successfully forge a block under Proof of Stake, reducing the reliance on staking pools.
- Energy efficiency: Proof of Stake is highly energy-efficient when compared to Proof of Work. Instead of relying on the computational cost of solving puzzles, the cost of participation is based on the economic cost of staking coins. This significantly reduces the energy consumption required to run the consensus mechanism.
- Scalability: Proof of Stake is more scalable than Proof of Work since it does not depend on physical machines for generating consensus. There is no need for large mining farms or extensive energy supplies. Adding more validators to the network is cheaper, simpler, and more accessible.
- Security: Staking serves as a financial motivator for validators to refrain from processing fraudulent transactions. If the network detects a fraudulent transaction, the validator stands to lose a portion of their stake and their right to participate in the future. As long as the stake is higher than the reward, validators would lose more coins than they would gain from engaging in fraudulent activity.
To effectively control the network and approve fraudulent transactions, a node would need to own a majority stake in the network, known as a 51% attack. Depending on the value of a cryptocurrency, gaining control of the network can be nearly impossible, as it would require acquiring 51% of the circulating supply.
However, this can also be a disadvantage, as explained below.
Disadvantages of Proof of Stake:
Although Proof of Stake offers many advantages over Proof of Work, it also has some weaknesses:
- Forking: In a standard Proof of Stake mechanism, there is no disincentive for mining both sides of a fork. Unlike Proof of Work, where mining both sides would result in a waste of energy, the cost of doing so under Proof of Stake is significantly lower. This means that individuals can “bet” on both sides of a fork.
2. Accessibility: To begin staking, one needs to possess the native tokens of the blockchain. This requires purchasing the tokens through an exchange or another method. Depending on the required amount, a significant investment may be needed to effectively participate in staking. In contrast, with Proof of Work, individuals can buy inexpensive mining equipment or rent it, allowing them to quickly join a mining pool and start validating and earning.
3. 51% attack: While Proof of Work networks are also susceptible to 51% attacks, such attacks can be relatively easier to execute in Proof of Stake. If the price of a token crashes or the blockchain has a low market capitalization, it can be theoretically inexpensive to acquire more than 50% of the tokens and gain control over the network. This poses a security risk to the consensus mechanism and the integrity of the blockchain.
Other consensus mechanisms built on Proof of Stake:
Proof of Stake is a highly adaptable consensus mechanism that can be modified to suit specific use cases. Some common variations include:
Delegated Proof of Stake (DPoS): DPoS allows users to stake coins without becoming validators. Instead, they stake their coins behind a validator and share in the block rewards. The selection chances of a validator increase based on the number of delegators staking behind them. Validators can adjust the amount shared with delegators as an incentive. Reputation also plays a significant role in attracting delegators.
Nominated Proof of Stake (NPoS): NPoS is a consensus model developed by Polkadot. It shares similarities with DPoS but with one key difference. If a nominator (delegator) stakes behind a malicious validator, they can also lose their stake. Nominators can choose up to 16 validators to stake behind, and the network equally distributes their stake among the selected validators. Polkadot utilizes game theory and election theory approaches to determine which validators will forge new blocks.
Proof of Staked Authority (PoSA): BNB Smart Chain employs Proof of Staked Authority to achieve network consensus. This consensus mechanism combines elements of Proof of Authority and Proof of Stake, allowing validators to take turns forging blocks. A group of 21 active validators is eligible to participate, selected based on the amount of BNB they stake or have delegated behind them. The selection process is determined daily, and BNB Chain stores this information.
Conclusion:
The process of adding transaction blocks to a network has evolved significantly since Bitcoin’s inception. The Proof of Stake system has emerged as a viable alternative to the energy-intensive Proof of Work mechanism. It offers numerous advantages and has proven its effectiveness. As time progresses, it appears that Bitcoin will be among a limited number of networks still using Proof of Work, while Proof of Stake is becoming the dominant consensus mechanism.