What Is Proof Of Stake (PoS)

Proof of Stake might still be relatively new but an increasing number of cryptocurrencies are relying on it to secure their blockchains. As of September 2023, 5 of the top 10 cryptocurrencies by market capitalization utilise Proof of Stake.

Ethereum, the second largest cryptocurrency, made the transition from Proof of Work to Proof of Stake. Find out what makes Proof of Stake an attractive option for blockchains.

What Is Proof Of Stake?

Proof of Stake (PoS) is a consensus mechanism used by blockchain networks to validate and secure transactions and create new blocks in a blockchain. Unlike Proof of Work (PoW), where miners solve complex problems to create new blocks on the blockchain, PoS relies on validators who are required to stake their tokens in the network to create new blocks and confirm transactions.

PoS is created to improve on the scalability and environmental concerns that are inherent in blockchains that utilize PoW consensus mechanisms.

A consensus mechanism is a crucial component in blockchain networks. It is a process by which multiple participants (nodes) in a network come to a common agreement regarding the order and validity of transactions. Consensus mechanisms ensure that all participants have a consistent view of the blockchain’s history without relying on a central authority.

This helps maintain trust, prevent double-spending, and secure the blockchain’s network.

How Does Proof Of Stake Work?

Proof of Stake requires participants to put up financial collateral and have “skin in the game” before they are allowed to secure and verify transactions on the blockchain.

In a Proof of Stake network, individuals and/or organizations that verify transactions are called “validators”. Instead of having to own expensive and energy-intensive computer equipment, to become a validator on the network, one needs to invest and stake the native coin on the blockchain.

For example, in Ethereum’s Proof of Stake system, you need to put up 32 ether - worth around $69,000 as of September 2023 - to become a validator. If you do not have that amount of ether lying around, you can join a staking service where participants pool their money together and serve as validators jointly. The staked amount serves as collateral, which can be confiscated in part if the network detects fraudulent transactions.

After staking the coin, the individual and/or organization join an activation queue. The PoS algorithm uses one of several methods to select validators in the activation queue. These are some of the common methods used:

• Size of the stake

In this method, the greater the amount of coin staked, the greater the probability of being selected to verify the transaction.

Ethereum, Algorand, Cardano, and Solana are some cryptocurrencies that select validators based on the size of their stake.

• Randomised selection

The randomized selection method selects validators based on their hit and target values. The node with the highest hit value and staked amount below the target value is selected to verify the transaction and create the next block.

Each node is assigned a hit value which is calculated by encrypting the hash of the previous block using his or her private key. Since each node’s private key is unique, the hit value derived is also unique for each node in the network.

The target value is calculated by involving the amount of coins staked by the node. Since the staked amount differs from node to node, the target value of each node is also different.

While the PoS algorithm still factors in the amount of coin staked in this method, it also selects validators based on uniquely derived values which gives the selection process a degree of randomness.

NXT and BlackCoin are examples of cryptocurrencies that use the randomized selection method.

• Age of the coin/token staked

This method selects validators based on how long their coins have been staked in the network. The longer the coins are staked, the greater the probability of being selected to verify the transaction.

Once the coins staked in this process are selected to verify the transaction, the age of those coins is reset to zero. This essentially means that these staked coins are pushed back to the bottom of the queue.

Peercoin is one of the cryptocurrencies that use the coin age selection method.

The validators selected to verify transactions will then create new blocks on the chain. The other validators that are not involved in the process will help validate the newly created blocks.

Once the new blocks are validated, they will be added to the blockchain. The validators that successfully create the new blocks will be rewarded with a certain amount of the network’s coin.

Advantages Of Proof of Stake

Energy Efficiency

Proof of Stake does not require the massive computational power and energy consumption commonly associated with Proof of Work mining. This makes the Proof of Stake consensus mechanism more energy efficient and addresses the environmental and sustainability concerns of blockchain networks.

Ethereum’s successful transition to Proof of Stake is estimated to slash its energy use by roughly 99.95% and potentially millions in cost savings.

Scalability

Blockchains that use Proof of Stake do not face the same block time constraints and can handle a larger number of transactions per second than blockchains that employ the Proof of Work consensus mechanism.

Solana, a blockchain that uses Proof of Stake, is able to achieve a transaction speed of 3,000 transactions per second (TPS). In contrast, Bitcoin is only able to process 7 TPS.

This allows Proof of Stake to support a wide range of applications and improved scalability compared to Proof of Work.

Criticisms Of Proof Of Stake

While Proof of Stake is able to solve many of the issues plaguing Proof of Work, it is not without its own limitations and criticisms.

51% attack

If someone owns 51% of the staked coin, the individual or organization can use that majority to alter the blockchain. While the networks of Proof of Work also encounter this same issue, Proof of Stake networks are more prone to such attacks. This is especially so if the price of the coin tanks or if it has a low market capitalization as it will be theoretically cheaper to purchase a majority (>50%) of the coin and take control of the network.

However, proponents of Proof of Stake argue that the only way such an attack can happen is that the individual or organization owns a majority of the staked assets. But because their own assets are staked in the network and these staked assets could potentially be taken away from them, bad actors are disincentivized from attacking the network.

Centralisation of Validators

Another criticism often leveled against PoS networks is that large coin holders are favoured and this results in centralisation. Critics argue that in order to become validators in PoS networks, only individuals and/or organizations that have the financial means are able to take part. And over time, the rich get richer each time they receive rewards as validators.

Variations of this Proof of Stake method have propped up with aims to solve this issue such as the randomized block selection and coin age selection methods. In addition, pooled staking services have also allowed a greater amount of people to participate in the validating process and placed it within the reach of everyday people.

Proof Of Stake Vs Proof Of Work

While both Proof of Stake and Proof of Work have the same end goal of achieving consensus on the blockchain, the way they achieve that differs. Instead of relying on miners to compete and use energy-intensive hardware to validate transactions in a Proof of Work consensus mechanism, Proof of Stake selects validators randomly with a higher probability given to validators who have a larger amount of stake positions in the coin or token.

Here are some of the key differences between Proof of Stake and Proof of Work:

Who Invented Proof of Stake

The Proof of Stake concept was introduced back in 2011 in a forum post on Bitcointalk. In the post, the anonymous user who goes by the username QuantumMechanic, argued that Bitcoin’s current PoW model not only consumes a lot of (computational and electrical) resources but also has high transaction fees.

The user suggested that transitioning to Proof of Stake could solve Bitcoin’s problems. Since Proof of Stake does not require validators to compete based on computational resources, fewer resources are expended to create new blocks. As such, validators’ operational costs are lower which results in lower transaction fees for users.

The first Proof of Stake blockchain, Peercoin, was launched in the same year. Peercoin was created by Sunny King and Scott Nadal. King was a computer scientist who worked on a number of other blockchain projects including NXT and Blackcoin. Nadal is a software engineer who worked on a number of open-source projects including the Bitcoin Core client.

While Peercoin did generate some hype in its initial years (Peercoin’s price went up 2,400% in 2013), it has since been overshadowed by other Proof of Stake blockchains such as Ethereum and Solana.

Proof of Stake Blockchains

These are some of the blockchains that use Proof of Stake:

• Ethereum

• Cardano

• Tezos

• Cosmos

• Polkadot

• Solana

• Avalanche

As the blockchain industry continues to grow, Proof of Stake is gaining widespread adoption and is at the heart of many prominent blockchain networks. Furthermore, in a world where sustainability, efficiency, and security are paramount, Proof of Stake offers a promising path forward for the future of blockchain technology.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.