What is Proof of Stake?

Proof of stake (PoS) is one of several methods to reach consensus on a blockchain. It was proposed as an alternative to proof of work because it uses less power to maintain the network.

Similarly to other consensus mechanisms it also secures the blockchain and deters malicious attacks.

How Proof of Stake Works

Proof of stake replaces miners on a blockchain with validators instead. The incentive for validators to maintain the network is still by means of a reward. However crypto rewards are not won by mining like in proof of work.

Instead the validator receives payment fees. These fees are for validating the payments in a block. If all the payments are fine then the block gets placed onto the blockchain.

Anyone can take part in the proof of stake network and become a validator. To do this, a potential validator needs a computer or node. Additionally this person will have to stake (lock) an amount of their crypto funds in the network.

Different validators are selected to approve transactions; one for each block. Validators are selected by the algorithm set by the blockchain using three factors:

  1. Staking age
  2. Randomisation
  3. Nodes wealth

Proof of Work Security

The reason why people have to stake their crypto to become a validator is for security. Validators are the only ones with the authority to approve transactions. As a result a validator either acting alone or with the help of other parties could potentially corrupt the network.

Hence this is why validators have to stake their cryptocurrency on the network. Malicious validators will get punished by the network if they approve fraudulent transactions.

The validator will lose a portion of their stake that is greater than the reward of committing the fraud. This maintains the integrity and trust in the blockchain by disincentivising bad behaviour.

Similarly to proof of work, proof of stake blockchains are still susceptible to 51% attacks. So if a malicious validator controls 51% of the network he/she will be able to control the whole blockchain.

Proof of Stake Coins

Proof of stake was created several years after proof of work. Hence there are many more cryptocurrencies using proof of work than proof of stake. However there are a few popular cryptocurrencies that do use PoS.

Additionally there is also Equilibria (XEQ). However at the moment Equilibria is not such a popular crypto. This is because it is still a new private oracle coin.

Popular Proof of Stake Coins:

Moreover Ethereum which is one of the best known cryptocurrencies will transition onto proof of stake. Ethereum currently uses proof of work. However the Ethereum developers are transitioning it onto a PoS system known as Ethereum 2.0.

Ethereum Proof of Stake Date

The developers are going to roll out improvements in 7 stages by slowly upgrading bits and pieces of the blockchain.

The first upgrade for the Beacon chain was already launched on December 1st 2020. The merge of the Beacon chain and transition to proof of work is estimated to happen in 2022.

Proof of Stake Advantages

Faster

Proof of stake is faster than proof of work. Moreover its core layer is more scalable so it can handle many more transactions per second.  

Energy Consumption

Proof of stake is an alternative to proof of work. As you can see in this article on Wired: blockchain tweak that could fix crypto’s colossal energy consumption.

This is because proof of work uses more energy because it involves mining cryptocurrency. In fact it was getting brought up on many occasions and shown in a negative light.

Proof of stake uses significantly less energy. As a results it has a lower carbon footprint that makes it more environmentally friendly.

Malicious Validators Are Punished

Unlike proof of work, proof of stake has a mechanism to punish malicious validators. In fact with proof of work cryptos, a successful malicious attack ends up destroying the network. This is because people lose confidence in the network and leave. However this has only happened to smaller cryptocurrencies.

On the other hand PoS systems confiscate funds from malicious validators. This puts off any validators to attack the network because they stand to lose more than they would gain.

Proof of Stake Disadvantages

Less Decentralised

Proof of stake was meant to make blockchains more decentralised. However people are noticing that in fact the opposite is happening. Proof of stake is more centralised control because of the way validators are selected.

Wealth is a big determining factor when it comes to selecting validator nodes. Even though there are another two factors that come into play.

Additionally other nodes do not get a chance to become validators might end up leaving the network. This is because it is not worthwhile to stand around idle and wait for the opportunity to become a validator.

As a result we can expect large crypto holders to get validator status. Like for example exchanges, trading platforms, founders and ICOs that are on the platform.

In conclusion this is the same old story of the rich becoming richer. The nodes that are more wealthy will end up chosen more often to validate the transactions. They get paid every time the validate so they will keep getting richer. They will also keep getting chosen in future because their stake will keep on increasing.

Less Secure

Proof of stake is less secure than proof of work. This is because of centralisation. More decentralised cryptos are able to withstand larger chunks of the network shutting down. Other nodes can take up the work instead as if nothing ever happened.

On the other hand with less nodes minding the network it is a bigger deal if some leaves. It leaves other validators with more accumulated power. Larger cryptocurrencies might not have this issue. However consolidation of power could happen in the long term.

As a result cryptocurrencies that need a high level of security should not opt for proof of stake.

Other Articles In This Section
What is Blockchain? An introduction to blockchain technology.
Proof of work. And how transactions are verified.
Proof of Stake. A more energy-efficient means of consensus?
What is Decentralised finance? An introduction and overview of DeFi.

Frequently Asked Questions

What is proof of stake?

Proof of stake is one type of method to reach consensus on a cryptocurrency. That means that everyone on the network needs to agree on the transactions that took place.  

How does proof of stake work?

People stake (lock) the crypto in the network to get a chance to become a validator and approve transactions. Validators are selected by:
1.     Their coins staking age
2.     Randomisation
3.     Nodes wealth

Is proof of stake better?

In comparison to proof of work, proof of stake is more energy efficient, faster and punishes malicious validators. However it is less decentralised and less secure. Read more about proof of stake.

Which crypto is proof of stake?

Some cryptos that are proof of stake are:
·      Cardano (ADA)
·      Solana (SOL)
·      Avalanche (AVAX)
·      Polkadot (DOT)
·      Binance Coin (BNB)
·      Cosmos (ATOM)
·      Equilibria (XEQ)
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