What is Proof of Stake (PoS)?

Proof of Stake (PoS) explained

Proof of stake is a popular alternative to proof of work. Validators do not need computing power to validate transactions, but must instead stake tokens, which greatly reduces the energy consumption required. Proof-of-stake also improves decentralization, security, and scalability.

Without access to cryptocurrencies, though, it’s hard to get access to proof-of-stake. If you choose a blockchain with a lower market capitalization, a 51% attack is also prone to occur. Since Proof of Stake is highly versatile, it also has various variations for different blockchains and use cases.

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Introduction

Proof of stake is currently the most popular choice for blockchain networks. But with so many variations, it can be difficult to understand its core concepts. You are unlikely to see it in its original form these days. However, all kinds of proof-of-stake share the same core concept. Understanding these similarities will help you make better choices about which blockchains to use and how they work.

What is Proof of Stake?

The Proof -of-Stake consensus algorithm was launched in 2011 via the Bitcointalk forum to solve the problems with Proof -of-Work . Although the two algorithms share the same goal of achieving blockchain consensus, the process for achieving the goal is quite different. Participants do not need to provide proofs that require intensive computation, only that they have staked their tokens.

How does Proof of Stake work?

Proof-of-stake algorithms use pseudo-random elections to select validators from a set of nodes. This system takes into account a combination of factors, including staking age (a randomization element) and node wealth.

In a proof-of-stake system, blocks are “forged” rather than mined. However, you may still hear the word “mining” occasionally. Most proof-of-stake cryptocurrencies are launched with “pre-forged” tokens for immediate node launch.

Users participating in the forging process must lock a certain amount of tokens into the network as their stake. The size of the stake determines the chance of selecting a node as the next validator. The greater the stake, the greater the chance. To ensure that the process is not only biased towards the richest nodes in the network, but a number of special ways are also added to this selection process. The two most commonly used methods are ” Randomized Block Selection” and ” Coin Age Selection”.

Random block selection

In the random block selection method, validator selection is determined by finding the node with the lowest hash and highest stake combination. Since the size of the stake is public, other nodes can often predict the next forger.

Coin age selection

The coin age selection method selects nodes according to the staking duration of the tokens. The coin age can be calculated by multiplying the number of days that tokens are held as equity by the number of pledged tokens.

When a node forges a block, its coin age is reset to zero and must wait a while before forging another block, which helps prevent nodes with large stakes from dominating the blockchain.

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Verify transaction

Every cryptocurrency that uses a proof-of-stake algorithm provides the network and users with what it thinks is the best combination of rules and methods.

If a node is selected to forge the next block, it will check whether the transactions in this block are valid. It then signs the block and adds it to the blockchain. This node is rewarded with transaction fees from the block, and in some blockchains, tokens.

If a node does not want to be a forger, the network will verify that the node has not added false blocks to the blockchain, and if the verification is correct, the node’s stake and earned rewards will be released after a period of time.

Which blockchains use proof-of-stake?

Most blockchains after Ethereum use a proof-of-stake consensus mechanism. Often, these mechanisms are modified to suit the needs of the network. We’ll cover these changes later in this article. Ethereum itself is currently moving towards Proof of Stake with Ethereum 2.0 .
Blockchain networks that use proof-of-stake or related forms include:

1. Binance Coin (BNB) Chain
2. Binance Coin (BNB) Smart Chain
3. Solana
4. Avalanche
5. Polkadot

Advantages of Proof of Stake

Proof of Stake has obvious advantages over Proof of Work. Because of this, new blockchains almost always use Proof of Stake. Its advantages include:

Adaptability

Proof-of-stake changes as user needs and the blockchain change. We can see this clearly from a large number of debugging applications. This mechanism is generic and easily adaptable to most blockchain use cases.

Decentralization

Large numbers of users are encouraged to run nodes because this method is more economical. This incentive and randomization process increases the level of decentralization of the network. Although staking pools exist, individuals have a much higher chance of successfully forging blocks based on proof-of-stake mechanisms. Overall, this reduces the need for staking pools.

Energy efficiency

Compared to Proof of Work, Proof of Stake is very energy efficient. The cost of participation depends on the economic cost of staking tokens, not the computational cost of solving the puzzle. This mechanism results in significantly less energy required to run the consensus mechanism.

Scalability

Since Proof of Stake does not rely on physical machines to generate consensus, it is more scalable. It doesn’t require huge mining farms, and it doesn’t require massive purchases of energy. Adding more validators to the network is cheaper, simpler and easier to implement.

Safety

Stake acts as an economic incentive for validators to not process fake transactions. If the network detects a fake transaction, the validator will lose part of the stake and the right to participate in future activities. Therefore, as long as the stake is higher than the reward, the validator will lose more tokens than the reward if they attempt to cheat.

To effectively control the network and approve fake transactions, nodes must have a majority stake in the network, also known as a 51% attack . Depending on the value of the cryptocurrency, gaining control of the network requires 51% of the circulating supply, which is nearly impossible to achieve.

However, this can also be a disadvantage, which we will explain below.

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Disadvantages of Proof of Stake

Although Proof of Stake has many advantages over Proof of Work, it still has some disadvantages:

Fork

Using standard proof-of-stake mechanisms does not curb mining on both sides of the fork . When using proof-of-work, mining both sides results in wasted energy. With proof-of-stake, the cost is significantly lower, meaning people can “bet” on both sides of the fork.

Accessibility

To start staking, you need a blockchain’s native token supply. This requires you to buy tokens through an exchange or other means. Depending on the amount required, you may need a large investment to effectively start staking. With proof of work, you can buy cheap mining rigs, or even rent them. This way, you can join a mining pool and quickly start validating and earning.

51% attack

While Proof of Work is also vulnerable to 51% attacks, it is significantly easier to use Proof of Stake. If the price of the token crashes or the market cap of the blockchain is low, it could theoretically be cheaper to buy 50%+ of the token and take control of the network.

Proof of Work vs. Proof of Stake

If we compare the two consensus mechanisms, some key differences emerge.

However, different blockchains have various proof-of-stake mechanisms. Many differences depend on the exact mechanism used.

Other consensus mechanisms based on proof of stake

Proof of stake is highly adaptable. The exact mechanism can be adjusted by developers to suit the specific use case of the blockchain. Here are a few of the most common mechanisms

Delegated Proof of Stake (DPoS)

Delegated Proof of Stake allows users to stake tokens without being a validator. In this case, they can stake with validators to share in the block reward. The more delegators behind a possible validator, the greater the chance of selection. Validators can usually change the amount shared with delegators as a reward. A validator’s reputation is also an important factor in a delegator’s choice.

Nominated Proof of Stake (NPoS)

Nominated Proof of Stake is a consensus model developed by Polkadot . It shares many similarities with Delegated Proof of Stake, but with one key difference. If nominators (delegators) follow malicious validators to stake, they may also lose stake. Nominators can choose up to 16 validators and stake them with them. The network will then distribute its stake evenly behind the selected validators. Polkadot also uses several methods from game theory and election theory to decide who will forge new blocks.

Proof of Authority Stake (PoSA)

The Binance Coin (BNB) Smart Chain uses authoritative proof-of-stake to generate network consensus. This consensus mechanism combines Proof of Authority and Proof of Stake into one, allowing validators to take turns forging blocks. Based on the amount of Binance Coin (BNB) staked or delegated behind the validator, a group of 21 active validators were selected to qualify. This set can be determined daily, and the Binance Coin (BNB) chain stores the selection.

The way we add blocks of transactions to the network has changed significantly since Bitcoin. We no longer need to rely on computing power to generate cryptocurrency consensus. Proof-of-stake systems have many advantages, and history has proven that proof-of-stake works. Over time, Bitcoin appears to be one of the few remaining proof-of-work networks that bear fruit. For now, Proof of Stake appears to be here to stay.

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