Proof of Stake or PoS Explained

Validating transactions using computing power is no longer the only option for achieving consensus in the blockchain. Proof of Stake (PoS) has emerged as a popular alternative mechanism. PoS requires validators to stake their coins rather than perform complex calculations. This significantly reduces energy consumption, while also improving decentralization, security, and scalability.

Despite these benefits, PoS does present some challenges. Access to cryptocurrency can make it difficult for some to participate in staking. Additionally, smaller market cap blockchains may be more vulnerable to a 51% attack, where a single user controls over half of the network's staked coins. Nonetheless, PoS remains a highly versatile consensus mechanism that can be adapted to various blockchains and use cases.

Basics

Today, Proof of Stake is widely used in blockchain networks, but its numerous variations can make it difficult to grasp its fundamental principles. Although PoS has evolved, it still shares common core concepts across all its variations. Having a clear understanding of these key concepts is crucial for making informed decisions about which blockchains to use and how they operate.

The Meaning of Proof of Stake

In 2011, a Bitcointalk forum user described the Proof of Stake consensus algorithm as an alternative to the Proof of Work algorithm. PoS was designed to address the limitations of PoW in achieving blockchain consensus. Unlike PoW, where users must provide computational proof, PoS participants only need to prove that they have staked coins.

How Does Proof of Stake Work?

In PoS algorithms, validators are chosen through a pseudo-random election process that takes into account factors such as staking age, node wealth, and an element of randomness. Unlike PoW systems, PoS "forges" blocks instead of mining them, though the term "mining" is sometimes still used. To enable immediate participation, most PoS cryptocurrencies start with a supply of "pre-forged" coins.

To participate in the forging process, users must lock a certain amount of coins into the network as their stake. The size of the stake determines a node's chances of being selected as the next validator; the larger the stake, the greater the chances. To prevent the wealthiest nodes from dominating the selection process, unique methods such as Randomized Block Selection and Coin Age Selection are employed.

Randomized Block Selection

Nodes are selected to validate blocks in Proof of Stake systems using different methods, including Randomized Block Selection. This method selects validators by finding nodes with the lowest hash value and the highest stake. The size of the stake is public information, making it possible for other nodes to predict the next validator.

Coin Age Selection

Nodes selected in the Coin Age Selection method are chosen based on how long their tokens have been staked, which is calculated by multiplying the number of days the coins have been staked by the number of coins staked. After forging a block, the node's coin age is reset to zero, and it must wait for a certain period before it can forge another block. This waiting period ensures that nodes with large stakes do not dominate the blockchain.

Validating Transactions

The Proof of Stake algorithm is unique to each cryptocurrency and is designed to be the best possible combination for the network and its users. When a node is selected to forge the next block, it will verify the block's transactions for their validity, sign the block and add it to the blockchain. The node is then rewarded with the transaction fees from the block and, in some blockchains, a coin reward. If a node decides to stop forging, its stake and rewards will be released after a specific period, allowing the network to verify that no fraudulent blocks have been added.

Proof of Stake Blockchains

The consensus mechanism known as Proof of Stake is prevalent in many blockchains that have emerged after Ethereum. Each network modifies the mechanism to meet its specific needs. Ethereum has already transitioned to Proof of Stake through Ethereum 2.0. Several blockchain networks, such as BNB Smart Chain, Solana, Avalanche, and Polkadot, use a version of the Proof of Stake consensus mechanism.

Pros of Proof of Stake

Proof of Stake is commonly favored over Proof of Work due to its many benefits. These benefits include adaptability, decentralization, energy efficiency, scalability, and security.

Adaptability

One of the most significant advantages of Proof of Stake is its adaptability. It can be modified to meet the changing needs of users and blockchains, making it a versatile consensus mechanism. As a result, many adaptations of Proof of Stake have emerged, catering to different blockchain use cases.

Decentralization

Another advantage is the decentralization that Proof of Stake offers. Since it's more affordable for users to run nodes, more people are incentivized to do so. The randomization process also encourages decentralization, reducing the need for staking pools. Even though staking pools exist, there's a much higher chance for an individual to forge a block under Proof of Stake successfully.

Energy Efficiency

Proof of Stake is incredibly energy efficient compared to Proof of Work. The cost of participation is based on staking coins' economic cost, rather than the computational cost of solving puzzles. This makes it less resource-intensive and less costly to run the consensus mechanism.

Scalability

Proof of Stake is also more scalable since it doesn't rely on physical machines to generate consensus. Adding more validators to the network is simpler, cheaper, and more accessible. There's no need for huge mining farms or sourcing large energy supplies.

Security

Proof of Stake provides a high level of security for the network. Staking acts as a financial motivator for validators to avoid processing fraudulent transactions. Validators lose a portion of their stake and their right to participate in the future if the network detects a fraudulent transaction. To control the network and approve fraudulent transactions, a node would have to own a majority stake in the network, also known as the 51% attack. However, this is almost impossible for a cryptocurrency with high value since acquiring 51% of the circulating supply would be costly.

Cons of Proof of Stake

Proof of Stake has some weaknesses despite the benefits it provides when compared to Proof of Work.

Forks

One drawback of Proof of Stake is the issue of forking. While mining both sides of a fork on a Proof of Work network leads to wasted energy, doing so on a Proof of Stake network incurs a much lower cost, making it possible to "bet" on both sides of the fork.

Accessibility

Another issue with Proof of Stake is accessibility. To participate in staking, one needs to have the native token supply of the blockchain. This may require significant investment depending on the required amount, as the tokens must be purchased via an exchange or other means. With Proof of Work, one can start earning rewards quickly by purchasing or renting inexpensive mining equipment and joining a pool.

Risk of 51% Attack

A 51% attack is a potential threat to both Proof of Work and Proof of Stake networks, but it can be easier to execute on a Proof of Stake network. If a token's value falls or the network has a low market capitalization, it can be relatively inexpensive to purchase more than 50% of the tokens and take control of the network.

PoW vs. PoS

A comparison of the two consensus mechanisms, Proof of Work and Proof of Stake, reveals fundamental differences.

Proof of Work requires mining equipment, while Proof of Stake requires minimal equipment or none. Energy consumption is high with Proof of Work, but low with Proof of Stake. Proof of Work tends toward centralization, while Proof of Stake leans towards decentralization.

The validation method for Proof of Work is computational proof, while Proof of Stake relies on the staking of coins. Despite these differences, there are many variations of Proof of Stake mechanisms across blockchains, and the exact mechanism used will determine many differences.

Proof of Stake Hybrid Consensus Mechanisms

The Proof of Stake mechanism is highly customizable to suit a blockchain's specific needs. Various adaptations are commonly seen, some of which are listed below:

Delegated Proof of Stake or DPoS

Users can participate in staking coins in Delegated Proof of Stake without becoming validators. They can delegate their coins to a validator and share in the block rewards. The selection chance of a validator increases with the number of delegators that stake behind them. Validators can adjust the amount shared with delegators as an incentive, and their reputation is also crucial for attracting delegators.

Nominated Proof of Stake or NPoS

Polkadot's Nominated Proof of Stake is a consensus mechanism that is similar to Delegated Proof of Stake but with one key difference. In NPoS, if a nominator stakes behind a malicious validator, they risk losing their stake. Nominators can choose up to 16 validators to stake behind. The network will then distribute their stake equally among the chosen validators. Polkadot utilizes game and election theories to determine who forges a new block.

Proof of Staked Authority or PoSA

The BNB Smart Chain implements the Proof of Staked Authority mechanism to achieve network consensus. This consensus model is a combination of Proof of Authority and Proof of Stake, where validators alternate forging blocks. 21 active validators, who have staked or delegated a substantial amount of BNB, are eligible to participate in the consensus process. The set of validators is selected daily and stored by BNB Chain.

Conclusion

The addition of transaction blocks to a network has transformed since the advent of Bitcoin. The Proof of Stake system has eliminated the need for computing power to establish crypto consensus, with numerous benefits. History has proven the success of Proof of Stake, indicating that Proof of Work networks, including Bitcoin, may soon become scarce. The future appears to be for Proof of Stake, which seems to have a permanent place in the market.