Carefully! Lots of text.
Proof of Stake is a popular alternative to the Proof of Work consensus algorithm. This mechanism does not use computing power to confirm transactions, but staked coins provided by validators. Proof of Stake can significantly reduce energy consumption, as well as increase decentralization, security and scalability.
However, Proof of Stake may not be as convenient for users who do not have access to cryptocurrency, and may also carry the risk of a 51% attack on blockchains with low market caps. Because Proof of Stake is extremely versatile, it has a wide range of variations for different blockchains and tasks.
Introduction
Proof of Stake is the most popular consensus algorithm for many blockchain networks today, but due to the large number of variations, it can be difficult to understand. Moreover, it is almost impossible to find this mechanism in its original form. However, all types of Proof of Stake work based on the same concepts, understanding which will help you make the best decision when choosing a blockchain.
What does Proof of Stake mean?
The Proof of Stake consensus algorithm was introduced in 2011 on the Bitcointalk forum with the goal of solving the problems of Proof of Work. While both of these mechanisms strive to achieve consensus on the blockchain, they do so in different ways. If Proof of Work users perform computational work, then Proof of Stake participants only need to stake coins.
How does Proof of Stake work?
The Proof of Stake mechanism is based on a random selection process that determines a validator from a group of nodes. To do this, the system uses a combination of factors, including the duration of coin staking, randomization and the financial security of the node.
In Proof of Stake systems, the term forging rather than mining is used in the context of creating blocks, but both options can be found. Most Proof of Stake cryptocurrencies launch with a supply of pre-created coins so that nodes can start working immediately.
To participate in the block creation process, users lock a number of coins on the network, adding them to staking. The number of coins staked increases the chances of each node being chosen as the next validator: the larger the staked amount, the higher the chances. To ensure a fair selection of nodes without favoring the richest, the selection process uses unique methods such as random block selection and staking duration selection.
Random block selection
In random block selection, validators are determined by searching for nodes with the smallest hash value and the largest staking amount. In this case, it is usually possible to predict in advance who will become the next validator, since the volume of coins staked by each participant is publicly available.
Selection by staking duration
When selecting by staking duration, validators are determined based on how long their tokens have been staked. Duration is calculated by multiplying the number of days a coin has been staked by the number of coins staked.
Once a block is created, the duration is reset to zero, so it will take some time before the same node is chosen to create the next block, preventing rich nodes from dominating the blockchain.
Transaction verification
Each cryptocurrency with a Proof of Stake consensus algorithm has its own set of rules and methods that ensure the efficiency of the network.
The node chosen to create a new block verifies the validity of the transactions, signs the block, and adds it to the blockchain. As a reward, the validator receives a portion of the transaction fees from the added block, and in some blockchains also a reward in the form of coins.
If a participant no longer wants to be an initiator, their earned rewards and staking coins are blocked for some time. This gives the system the opportunity to check whether the initiator has added fraudulent blocks to the blockchain.
Which blockchains use Proof of Stake?
Most blockchains that emerged after Ethereum use Proof of Stake consensus mechanisms. Typically, each mechanism is modified to suit the needs of the network. Next we will look at them in more detail. Ethereum itself is currently in the process of transitioning to Proof of Stake through the Ethereum 2.0 update.
Blockchain networks using Proof of Stake or variations thereof include:
1. BNB Chain
2. BNB Smart Chain
3. Solana
4. Avalanche
5. Polkadot
Benefits of Proof of Stake
Since Proof of Stake is superior to Proof of Work in many aspects, it is used in almost all new blockchains. Its advantages include:
Adaptability
Proof of Stake strives to meet the changing needs of users and the evolving blockchain, which is reflected in the emergence of new and diverse variations of the algorithm. This mechanism is multifunctional and suitable for most blockchain tasks.
Decentralization
Running nodes has become more accessible, and the network aims to encourage users to run them. The incentive system and randomization process also make the network more decentralized. Despite the existence of staking pools, the likelihood of an individual successfully creating a block under Proof of Stake is much higher. This reduces the need to create staking pools.
Energy efficiency
Compared to Proof of Work, Proof of Stake is incredibly energy efficient. In such a mechanism, the cost of participation depends on the economic cost of staking rather than the computational cost of solving the puzzles. Thus, running this consensus mechanism requires much less energy costs.
Scalability
Because Proof of Stake does not rely on physical machines to achieve consensus, it is a more scalable mechanism. It does not require buying huge mining farms and expending a large amount of energy. Using multiple validators on the network is much cheaper, easier and more accessible.
Safety
The staking mechanism incentivizes the initiator to create only verified blocks. If the network detects a fraudulent transaction, the validator will lose some of their stake and the right to create blocks in the future. Thus, if the staking share is greater than the reward, the dishonest validator will lose more coins than he receives.
To take control of the network and conduct fraudulent transactions, a node must own a larger share of the network - this is called a 51% attack. However, this can only be done if you acquire 51% of the coins in circulation, which is practically impossible.
Still, in some cases this can be a disadvantage - we'll look at this next.
Disadvantages of Proof of Stake
Even though Proof of Stake has many advantages over Proof of Work, it still has some disadvantages:
Forky
With the standard Proof of Stake mechanism, there are no barriers to mining on either side of the fork. However, with Proof of Work, mining on both sides will lead to high energy costs. Using Proof of Stake can significantly reduce costs, allowing users to “stake” on both sides of the fork.
Availability
For staking, users will need native blockchain tokens - these can be purchased through an exchange or any other method. Sometimes, effective staking may require significant investment.
The Proof of Work mechanism allows you to work on cheap mining equipment or even rent it. Thanks to this, users can join the pool and start quickly verifying transactions and earning money.
Attack 51%
Although Proof of Work is also susceptible to 51% attacks, blockchains with a Proof of Stake mechanism are more vulnerable to them. If the price of a token collapses or the blockchain has a low market capitalization, attackers could theoretically acquire more than 50% of the tokens at a low price and seize control of the network.
Proof of Work и Proof of Stake
When comparing these two consensus mechanisms, several key differences emerge.
However, there are a wide variety of versions of Proof of Stake on blockchains. Many differences will depend on the specific objectives of the mechanism.
Variations of the Proof of Stake mechanism
Proof of Stake is highly adaptable. Developers can change the mechanism in accordance with the specifics of the blockchain. The following are some of the most common variations.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake allows users to stake coins without becoming a validator. In this case, they act as delegates: they contribute funds to staking through the validator and receive part of the rewards for the block. The more delegates support a possible validator, the higher the chances of his selection. Typically, delegates are guided by the amount of incentive that validators offer, as well as their reputation.
Nominated Proof of Stake (NPoS)
Nominated Proof of Stake is a consensus model developed by Polkadot. It is similar in many ways to Delegated Proof of Stake, but with one key difference: if a nominee (delegate) stakes funds through a malicious validator, they also risk losing their funds.
Nominees can choose up to 16 validators through whom they will contribute funds to staking. The network will then distribute the coins equally among the selected validators. Polkadot also uses several game theory and election theory approaches to determine who will forge a new block.
Proof of Staked Authority (PoSA)
BNB Smart Chain uses Proof of Staked Authority to achieve network consensus. This consensus mechanism combines Proof of Authority and Proof of Stake, allowing validators to take turns forging blocks. A group of 21 active validators are allowed to participate, selected by the amount of BNB they have staked or delegated on their behalf. This group is selected daily, and BNB Chain stores information about this selection.
Conclusion
Methods for adding blocks to the network have changed significantly since the inception of Bitcoin. Now users do not need to rely on computing power to create crypto-consensus. Instead, they can use the Proof of Stake algorithm, which has many advantages and has been proven to be effective. Perhaps, over time, its alternative, the Proof of Work mechanism, will be used only by Bitcoin and a small number of other networks. Regardless, Proof of Stake is definitely here to stay for a long time.
