With the Ethereum Merge poised to happen in September 2022, everyone in the crypto space and their mother should be aware of the term ‘Proof of Stake’ by now, even if they had somehow missed hearing of it before. Proof of Stake in blockchain is a consensus mechanism– one that will run Ethereum once The Merge takes place- used for processing transactions and adding new blocks to a chain.
As a newcomer to the crypto world, you might not be aware of the intricacies of PoS yet. That’s why, in this post, we thoroughly explain to you what is Proof of Stake blockchain and what does Proof of Stake mean, and also attempt to answer any and all questions you may have regarding the consensus mechanism!
What is Proof-of-Stake in Blockchain, Exactly?
As mentioned, Proof of Stake in crypto is a consensus mechanism- which is the method used to validate new entries in a distributed database and keep said data secure. A blockchain being this distributed database, a consensus mechanism is used to secure the blockchain.
Proof of Stake is one of the two most used consensus algorithms in contemporary blockchains, the other being PoW or Proof of Work. Fun fact: PoW is actually the OG consensus mechanism that originated as a way to keep the Bitcoin blockchain secure, and PoS was developed as an alternative to PoW.
Proof of Stake chooses which participants on a blockchain get to perform the task of validating new entries and adding new blocks to the chain. These users get rewarded once they do their job successfully, usually with a set amount of the blockchain’s native crypto.
The Ethereum blockchain used to be a Proof of Work chain, but with the aforementioned Ethereum Merge, they will now be switching over to a Proof of Stake blockchain. One of the main reasons for The Merge is, of course, the fact that PoS solves for the issue of crypto’s environmental impact.
How Can Proof-of-Stake Solve Crypto’s Environmental Impact?
Especially compared to Proof of Work, PoS is a much more eco-friendly consensus mechanism. Proof of Stake requires lesser energy to verify transactions since there is zero specialized mining equipment involved, and thus promises a better outcome for the environment.
According to a University of Cambridge estimate, China will account for approximately 65% of global Bitcoin production in 2020. Although the country prohibited Bitcoin mining for a variety of reasons, one of which was the massive energy consumption required by Bitcoin and the impediment it posed to China’s goal of carbon neutrality by 2060. A major difference between proof-of-work and proof-of-stake is that rather than requiring powerful computers to expend a lot of energy to earn the block reward, Proof-of-Stake protocols assign the right to validate the next block and earn the block rewards associated with adding that block to the blockchain to a user who has locked up the required amount of cryptocurrency at random. The only hardware requirement is that the device is internet-connected.
As a result, there is no incentive to use specialized energy-hungry machines, as in proof-of-work mining. Because the “stake” (the number of tokens) rather than the “work” (the amount of energy expended) secures the network, PoS reduces network power demand by more than 99% when compared to PoW.
Since PoW has already gotten a bad reputation for the overwhelming amounts of computational power and energy it consumes, it makes sense that Proof of Stake is preferred over it by many developers.
What Does Proof-of-Stake Mean in Consensus Mechanism?
Now that we have a general idea of what is Proof of Stake in blockchain, let’s see in detail how this consensus mechanism works.
To understand the Proof of Stake model, let’s first understand what does Proof of Stake mean. The consensus mechanism allows the owners of certain crypto to ‘stake’ a certain amount of coins on the native blockchain, hence the title. And what is stake in crypto, you ask? Well, ‘staking’ signifies the act of pledging a certain amount of the coins you own for verifying transactions on the blockchain. Keep in mind that your crypto is locked up for a specified time period when you stake them.
Now, how are blocks validated on a Proof of Stake blockchain? Once a block of transactions is ready to be processed, the protocol chooses a ‘validator’ node to review the block from among those who have staked their crypto. The validator now checks if the transactions included in the block are valid, and once they confirm it, they add it to the blockchain. The validator is then rewarded for the successful completion of their task.
However, if the block verified by a validator is found to have discrepancies, the validator is penalized and stands to lose some or all of their staked funds.
Mining Power in Proof-of-Stake
Now that you know what is stake in crypto, you must also be aware of how ‘mining power’ works in Proof of Stake. Mining power- or the ability to mine blocks- depends on the number of crypto tokens a user has staked. The more a user has staked coins, the more likely they are to be chosen as a validator.
The process to pick validators varies from blockchain to blockchain based on the type of Proof of Stake protocol used. There is usually an element of randomization involved though, and of course, it depends on how long a user has had their coins staked.
To become a validator on a PoS blockchain, one usually has to stake quite a big amount of coins, which not everyone can afford. This is why many participants join staking pools. The owners of these staking pools set up validator nodes, and the participants pool their coins together as ‘delegators’ so they have a better chance at mining new blocks. The rewards earned are then split among the pool’s participants in equivalence to their contributions.
Proof-of-Stake Vs. Proof-of-Work Difference
While PoS and PoW are the two prevalent consensus mechanisms used when it comes to blockchain architecture today, they vary greatly in their approaches to achieving consensus.
On a Proof of Work blockchain, miners solve complex mathematical problems to verify transactions and need specialized mining equipment for it. As for a Proof of Stake blockchain, we know a user only needs to stake a set amount of native coins to qualify as a validator.
Here are some primary features of the two consensus mechanisms, weighed against each other:
|Process of adding new blocks||Block creators are called miners, they have to solve complex mathematical equations to add blocks||Block creators are known as validators, they need to stake a certain amount of crypto to add blocks|
|Energy efficiency||Consumes a lot of energy and impacts the environment greatly. Cryptos that use PoW are often excluded from ESG portfolios||Is more energy efficient, and thus more in demand for an ESG portfolio|
|Scalability||Is not very scalable||The energy efficiency allows for better scalability|
|Security||Since the equipment and energy costs are pretty great, PoW blockchains limit access to mining, strengthening the security of the blockchain in the process||Aside from the inherent security of blockchains, most PoS protocols have additional security measures in place|
Pros and Cons of Proof-of-Stake in Crypto
Advantages of the Proof of Stake algorithm are many, such as:
- With Proof of Stake, more and more people can participate in blockchain systems as validators, since there’s no need to acquire expensive special hardware or pay massive electricity bills.
- Depending on the PoS blockchain one chooses, it’s possible to earn yields between 5% to 14% on their holdings through staking.
- Since PoS blockchains are more scalable than PoW ones, they can theoretically support more transactions without compromising on integral factors like security or decentralization.
Now, Proof of Stake, just like any other consensus algorithm, also has its drawbacks, like:
- Proof of Stake is relatively new compared to PoW, so it simply has not proved itself as extensively in its ability to secure blockchains through decades.
- Various implementations of Proof of Stake are, theoretically, more susceptible to attacks like low-cost bribe attacks.
- Validators who have a large amount of a certain blockchain’s token gets an unfair amount of influence on a PoS system.
- Unlike proof-of-work, this paradigm can lead to centralization. Furthermore, forking is not automatically discouraged by proof-of-take systems. When a blockchain splits, a validator receives a duplicate copy of its stake on the newly forked blockchain.
Goals of Proof-of-Stake
Proof of Stake was, in the first place, designed to solve for two primary issues of the PoW mechanism- the scalability problems, and the environmental sustainability concerns. The goal of Proof of Stake is to solve these issues by substituting the act of staking for computation power. This way, a user’s mining powers are randomized by the network algorithm itself.
With PoS, theoretically, there would be a significant reduction in the energy consumed by the crypto sector, since miners would no longer be able to rely on big brands of specialized mining hardware to have the upper hand.
The Security Factor of the Proof-of-Stake Algorithm
While it’s widely believed that depending on the implementation of the Proof of Stake algorithm, a blockchain can be vulnerable to various types of attacks, it must be noted that the PoS consensus mechanism is structured in a way that would make any attack less impactful.
For example, the 51% attack is thought to be a major concern for a Proof of Stake blockchain, but in truth, that would be quite unlikely. Before we understand why let’s see what a 51% attack is.
A 51% attack, as the name states, is when a malicious user or group of users controls 51% or more of a crypto and uses the majority power to forcibly alter the blockchain.
For a 51% attack to work on a PoS blockchain, a user or group of users would have to own 51% of the total staked crypto. Now, why is that so unfathomable? Because-
- That would be extremely expensive.
- Since the staked currency symbolizes the users’ chances to mine, any user who participates in a 51% attack stands to lose all the funds they have put up for stake. Thus, the individuals who stake on PoS blockchains have an incentive to act in good faith, which in turn benefits the network and strengthens the security factor.
There are also many other security features Proof of Stake blockchains use that are not talked about much, as that would make any bad actors aware of their existence and betray the purpose of their integration.
What are the Features of Proof of Stake?
1. Fixed Coins in Existence
The mining difficulty determines the timing of blocks in proof-of-work, whereas the tempo is fixed in what is proof-of-stake. Time spent on proof-of-stake Ethereum is divided into 12-second slots and epochs (32 slots). The network always has a limited number of coins in circulation. There is no possibility of producing new coins. In each slot, one validator is chosen at random to be a block proposer. When Ethereum implements sharding, a validator will verify the transactions. The validator will further add them to a shard block. This requires a committee of at least 128 validators. After validating shards and creating a block, two-thirds of the total validators must agree with each other that the transaction is valid before the block can be closed.
2. Transaction Fee as a Reward to Minters/Forgers
To achieve consensus, different proof mechanisms may employ different methods. In most proof-of-stake cases, digital currency units are created at the time of the currency’s launch and have a fixed number. As a result, rather than receiving cryptocurrency units as a reward, the forgers receive transaction fees. Validators are chosen at random to confirm transactions and validate block data. Rather than using a competitive rewards-based mechanism like proof-of-work, this system randomizes who gets to collect fees. If the forged block is discovered to be fraudulent, the transaction fee is forfeited. Before a user can become a validator on Ethereum, 32 ETH must be staked.
3. The Impracticality of the 51% Attack
A 51% attack occurs when an entity controls more than 50% of the miners in a network and uses that majority to alter the blockchain in a PoW network. A group or individual would need to own 51% of the staked cryptocurrency in PoS. This makes a malicious network attack more difficult because purchasing more than half of the coins is likely to be more expensive than acquiring 51% of proof-of-work hashing power. If a 51% attack occurred in Ethereum’s PoS, the network’s honest validators could vote to disregard the altered blockchain and burn the offender(s) staked ETH. Validating incorrect transactions will also result in the validator losing its stake, making it reward-negative.
Proof of Stake is still very new, in one of the earliest stages of its development as a consensus mechanism. However, the tremendous potential it holds is undeniable. With minimal energy requirements, more accessibility for the common populace to enter the crypto space, and higher scalability, Proof of Stake may just be able to give crypto the final push it needs to go mainstream.
Frequently Asked Questions (FAQs)
1. What is the Difference Between Proof of Work and Proof of Stake Blockchains?
PoS blockchains use randomly picked users as validators who can add blocks to the chain. On the other hand, PoW blockchains have their miners solve complex mathematical problems to win the chance to add a block to the chain.
2. Is Proof of Stake a Certificate?
The Proof of Stake consensus mechanism gets users with the highest stakes to act as validators who add new blocks to the chain. There are no certificates issued at the moment.
3. How Do You Earn Proof of Stake?
Since PoS is a consensus mechanism, you can not ‘earn’ Proof of Stake. On a PoS blockchain, you can become a validator by staking a certain amount of coins, and get rewarded, however.
4. Can Bitcoin Be Converted to Proof-of-Stake?
Since Ethereum is already converting from PoW to PoS, it is technically possible for the Bitcoin blockchain to also do that same. However, the entire process may take years to be planned and implemented, especially considering how widespread and well-used Bitcoin is as a crypto.
5. Which Cryptocurrencies Use Proof of Stake?
The very first crypto to adopt the PoS mechanism was one called Peercoin. Currently, there are around 100 crypts that use PoS for their blockchains. Some of the most popular ones at the moment would be :
- Tron (TRX)
- Cardano (ADA)
- Tezos (XTC)
- EOS (EOS)
- Cosmos (ATOM)
Of course, ETH will also become a PoS token soon enough.
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