What is Proof of Stake (PoS)?
Proof-of-stake (PoS) is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchain—so the consensus mechanism secures the blockchain.
Under proof-of-stake (POS), validators are chosen based on the number of staked coins they have. Proof-of-stake (POS) was created as an alternative to proof-of-work (POW), the original consensus mechanism used to validate transactions and open new blocks. While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms require validators to hold and stake tokens for the privilege of earning transaction fees.
Difference between PoS and PoW
Proof-of-work (PoW) and proof-of-stake (PoS) are both consensus mechanisms used by blockchains to achieve distributed consensus. The main difference between the two is how they select validators to confirm transactions and validate block information.
In PoW, miners compete to solve cryptographic puzzles, and the first miner to solve the puzzle gets to validate the block and collect the transaction fees. This system requires a lot of computational work, which is why it’s called “proof-of-work”.
On the other hand, in PoS, validators are chosen based on the number of staked coins they have. Instead of competing to solve puzzles, validators hold and stake tokens for the privilege of earning transaction fees. This system reduces the amount of computational work needed to verify blocks and transactions.
Advantages of Proof-of-Stake
- Better energy efficiency: PoS requires much less energy than PoW, which is computationally intensive and requires a lot of electricity.
- Lower barriers to entry: PoS has lower hardware requirements than PoW, making it easier for more people to participate in the network.
- Reduced centralization risk: PoS should lead to more nodes securing the network because of the low energy requirement, reducing the risk of centralization.
- Less issuance required: PoS requires less issuance of new coins to incentivize participation, reducing inflation.
Disadvantages of Proof-of-Stake
- Less battle-tested: PoS models have not been battle-tested to the same degree as PoW models, and there are concerns about the long-term security and viability of various PoS designs.
- Wealth concentration: In PoS, validators are chosen based on the number of staked coins they have, which could lead to wealth concentration and centralization.
- Nothing-at-stake problem: In PoS, there is a potential issue known as the “nothing-at-stake” problem, where validators have nothing to lose by voting for multiple blockchain histories, potentially leading to consensus failure.
- Long-range attacks: PoS is potentially vulnerable to long-range attacks, where an attacker with a small amount of stake could create a long alternate history of the blockchain.
Cryptocurrencies that use PoS
There are several cryptocurrencies that use proof-of-stake as their consensus mechanism. Some of the most popular coins using proof of stake include Cardano (ADA), Tron (TRX), EOS (EOS), Cosmos (ATOM), and Tezos (XTZ). Ethereum, the second-largest crypto by market capitalization after Bitcoin, is also in the midst of a transition from proof of work to proof of stake.
Ethereum’s transition
Ethereum switched on its proof-of-stake mechanism in 2022 because it is more secure, less energy-intensive, and better for implementing new scaling solutions compared to the previous proof-of-work architecture. This switch is known as the “merge” .
With the merge, Ethereum has transitioned to a consensus mechanism called proof-of-stake, which uses far less power and should make the network about 99% more energy-efficient, according to figures from the Ethereum Foundation.
Staking in PoS
In proof-of-stake (PoS), validators are chosen based on the number of staked coins they have. To participate as a validator, a user must deposit a specific amount of coins into the deposit contract and run the required software.
On depositing their coins, the user joins an activation queue that limits the rate of new validators joining the network. Once activated, validators receive new blocks from peers on the Ethereum network. The transactions delivered in the block are re-executed, and the block signature is checked to ensure the block is valid. The validator then sends a vote (called an attestation) in favor of that block across the network.
This staked capital then acts as collateral that can be destroyed if the validator behaves dishonestly or lazily. The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves.