Proof of Stake (PoS) is a leading consensus algorithm that serves as a popular alternative to Proof of Work (PoW). Instead of relying on computational power to validate transactions, PoS uses coins that validators lock up in a process known as staking. This mechanism significantly reduces energy consumption while enhancing decentralization, security, and scalability.
However, PoS might be less accessible to users who do not hold cryptocurrency and could pose a risk of 51% attacks on blockchains with low market capitalization. Due to its high versatility, Proof of Stake comes in many variations tailored to different blockchain needs and applications.
Introduction to Proof of Stake
Today, Proof of Stake is the most widely adopted consensus algorithm for many blockchain networks. However, its numerous variations can make it challenging to understand. Moreover, it is rare to find this mechanism in its pure, original form. Despite this, all types of PoS operate on the same core concepts. Understanding these principles can help you make informed decisions when choosing a blockchain.
The Meaning of Proof of Stake
The Proof of Stake consensus algorithm was introduced in 2011 on the Bitcointalk forum as a solution to the problems associated with Proof of Work. Although both mechanisms aim to achieve consensus on the blockchain, they do so in fundamentally different ways. While Proof of Work requires participants to perform computational tasks, Proof of Stake only requires users to stake their coins.
How Proof of Stake Works
At the heart of Proof of Stake is a random selection process that chooses a validator from a group of nodes. The system uses a combination of factors, including the amount staked, the duration of the stake, randomization, and the node’s financial stake.
In PoS systems, the term "forging" is often used instead of "mining" in the context of block creation, though both terms may appear. Most Proof of Stake cryptocurrencies launch with a supply of pre-generated coins, allowing nodes to begin operating immediately.
To participate in the block creation process, users lock a certain number of coins in the network by staking them. The amount staked increases a node’s chances of being selected as the next validator: the larger the stake, the higher the probability. To ensure a fair selection process that does not favor the wealthiest nodes, unique methods such as random block selection and coin age-based selection are employed.
Random Block Selection
In random block selection, validators are identified by searching for nodes with the smallest hash value and the largest stake. The next validator can often be predicted in advance since the amount staked by each participant is publicly available.
Coin Age Selection
In coin age-based selection, validators are chosen based on how long their tokens have been staked. The "coin age" is calculated by multiplying the number of days the coins have been staked by the number of coins staked.
After a block is created, the coin age resets to zero. This means the same node must wait awhile before being eligible to create another block, preventing wealthy nodes from dominating the blockchain.
Transaction Validation
Each cryptocurrency using the Proof of Stake consensus algorithm has its own set of rules and methods to ensure network efficiency.
The node selected to create a new block verifies the validity of transactions, signs the block, and adds it to the blockchain. As a reward, the validator receives a portion of the transaction fees from the block they added. In some blockchains, they may also receive a coin reward.
If a participant no longer wishes to be a validator, their earned rewards and staked coins are locked for a certain period. This allows the system to verify whether the validator added any fraudulent blocks to the blockchain.
Which Blockchains Use Proof of Stake?
Most blockchains launched after Ethereum use Proof of Stake or its variants. Typically, each mechanism is modified to suit the network’s specific needs. Ethereum itself is currently transitioning to Proof of Stake through the Ethereum 2.0 upgrade.
Notable blockchain networks using Proof of Stake or its variations include:
- BNB Chain
- BNB Smart Chain
- Solana
- Avalanche
- Polkadot
Advantages of Proof of Stake
Since Proof of Stake outperforms Proof of Work in many aspects, it is used in almost all new blockchains. Its advantages include:
Adaptability
Proof of Stake aims to meet the evolving needs of users and the developing blockchain landscape, leading to a wide array of algorithm variations. This mechanism is highly versatile and suitable for most blockchain applications.
Decentralization
Running a node has become more accessible, and the network incentivizes users to operate nodes. The system’s incentive structure and randomization process also promote greater decentralization. Although staking pools exist, an individual’s chance of successfully creating a block in Proof of Stake is much higher. This reduces the necessity for staking pools.
Energy Efficiency
Compared to Proof of Work, the Proof of Stake algorithm is incredibly energy-efficient. In PoS, the cost of participation depends on the economic stake rather than the computational expense of solving puzzles. As a result, this consensus mechanism requires far less electricity.
Scalability
Since Proof of Stake does not rely on physical machines to achieve consensus, it is more scalable. There is no need to purchase massive mining farms or consume vast amounts of energy. Using multiple validators across the network is cheaper, simpler, and more accessible.
Security
The staking mechanism incentivizes validators to create only verified blocks. If the network detects a fraudulent transaction, the validator will lose a portion of their staked funds and the right to create future blocks. Therefore, if the staked amount is greater than the potential reward, a malicious validator stands to lose more than they could gain.
To seize control of the network and conduct fraudulent transactions, a node would need to acquire a majority stake—a scenario known as a 51% attack. However, this would require purchasing 51% of the circulating coins, which is practically impossible in well-established networks.
Still, in some cases, this can be a disadvantage, which we will explore further.
Disadvantages of Proof of Stake
Despite its many advantages over Proof of Work, Proof of Stake still has some drawbacks:
Forks
In a standard Proof of Stake mechanism, there are no barriers to staking on both sides of a fork. In Proof of Work, mining on both sides would lead to significant energy costs. Proof of Stake drastically reduces these costs, enabling users to stake on both sides of a fork.
Accessibility
To participate in staking, users need the blockchain’s native tokens, which can be acquired through an exchange or other means. Sometimes, effective staking may require a substantial investment.
Proof of Work, on the other hand, allows users to operate on cheap mining hardware or even rent it. This enables users to join a mining pool and start verifying transactions and earning rewards quickly.
51% Attack Vulnerability
Although Proof of Work is also susceptible to 51% attacks, blockchains using Proof of Stake can be more vulnerable. If a token’s price crashes or the blockchain has a low market capitalization, attackers could theoretically acquire over 50% of the tokens at a low cost and take control of the network.
Proof of Work vs. Proof of Stake
Comparing these two consensus mechanisms reveals several key differences. However, the wide variety of Proof of Stake versions across blockchains means that many distinctions depend on the specific implementation.
Variations of Proof of Stake
Proof of Stake is highly adaptable. Developers can modify the mechanism to suit their blockchain’s specific operational needs. Below are some of the most common variations.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake allows users to stake their coins without becoming validators. Instead, they act as delegates: they stake their funds through a validator and receive a portion of the block rewards. The more delegates that support a potential validator, the higher its chances of being selected. Delegates typically consider the incentive amount offered by validators and their reputation.
Nominated Proof of Stake (NPoS)
Nominated Proof of Stake is a consensus model developed by Polkadot. It is similar to Delegated Proof of Stake but with one key difference: if a nominator (delegate) stakes funds through a malicious validator, they also risk losing their funds.
Nominators can choose up to 16 validators to stake with. The network then distributes the staked coins equally among the selected validators. Polkadot also uses game theory and election theory approaches to determine who will forge the next block.
BNB Smart Chain uses Proof of Staked Authority to achieve network consensus. This hybrid mechanism combines Proof of Authority and Proof of Stake, allowing validators to take turns forging blocks. A group of 21 active validators is selected based on the amount of BNB they have staked or delegated on their behalf. This group is chosen daily, and the BNB Chain maintains a record of the selection.
Frequently Asked Questions
What is the main purpose of Proof of Stake?
Proof of Stake is a consensus algorithm that enables blockchain networks to validate transactions and create new blocks without relying on energy-intensive mining. It uses staked cryptocurrency to secure the network and achieve agreement among participants.
How does staking work in Proof of Stake?
Staking involves locking up a certain amount of cryptocurrency in a wallet to support network operations. In return, stakers may earn rewards for validating transactions or creating blocks. The more you stake, the higher your chances of being selected as a validator.
Is Proof of Stake more secure than Proof of Work?
Proof of Stake offers robust security by financially incentivizing honest behavior. Validators risk losing their staked funds if they act maliciously. While both mechanisms have strengths, PoS reduces the risk of centralization and 51% attacks in well-established networks.
Can I participate in staking with a small amount of crypto?
Yes, many blockchains allow staking with minimal amounts. However, larger stakes may increase your rewards and chances of being chosen as a validator. Some platforms also offer staking pools for smaller investors.
What is a 51% attack in Proof of Stake?
A 51% attack occurs when a single entity gains control of more than half of the staked tokens in a network. This could allow them to manipulate transactions. However, executing such an attack is costly and impractical for major blockchains.
Are there risks involved in staking?
Yes, staking involves risks such as token price volatility, lock-up periods, and potential slashing (penalties) for malicious actions or network failures. Always research the specific blockchain’s rules before staking.
Conclusion
Blockchain consensus methods have evolved significantly since Bitcoin’s inception. Users no longer need to rely solely on computational power to achieve crypto consensus. Instead, they can use the Proof of Stake algorithm, which offers numerous advantages and has proven effective. Over time, Proof of Work may remain only in Bitcoin and a few other networks, while Proof of Stake is likely here to stay. For those looking to explore advanced staking strategies or understand real-time network participation, many resources and platforms are available.