TL;DR (RESUME)
Proof of Stake is a popular alternative consensus mechanism to Proof of Work. Instead of needing computing power to validate transactions, validators must stake coins. This fact drastically reduces the necessary energy consumption. Proof of Stake also improves decentralization, security and scalability.
However, it may be more difficult to access Proof of Stake if you do not have access to cryptocurrency. It can also be easy to achieve a 51% attack on blockchains with low market cap. Since Proof of Stake is very versatile, it presents a wide range of variations for different blockchains and use cases.
Introduction
Currently, Proof of Stake is by far the most popular option for blockchain networks. But with so many variations, it can be difficult to understand its fundamental concepts. Today, you are unlikely to find it in its original form. However, all Proof of Stake types share the same key core concepts. Understanding these similarities will help you make better decisions about the blockchains you use and the way they operate.
What does Proof of Stake mean?
The Proof of Stake consensus algorithm was presented in 2011, on the Bitcointalk forum. It was proposed as a solution to Proof of Work problems. Although both share the same goal of reaching consensus on the blockchain, the process they follow is quite different. Instead of having to prove that they have extensive computing resources, participants simply prove that they have staked coins.
How does Proof of Stake work?
The Proof of Stake algorithm uses a pseudo-random election process to select validators from a group of nodes. The system uses a combination of factors, such as staking age, an element of randomness, and node wealth.
In Proof of Stake systems, blocks are "forged" rather than mined. However, the term "mining" may still be used occasionally. Most Proof of Stake cryptocurrencies launch with a supply of “pre-forged” coins to allow nodes to get started immediately.
Users participating in the forging process must block a certain amount of coins on the network as their stake. The stake size determines the probability of a node being selected as the next validator: the higher the stake, the higher the probability. Unique methods are added to the selection process to avoid favoring only the richest nodes in the network. The two most commonly used methods are Randomized Block Selection and Coin Age Selection.
Randomized Block Selection
In the random block selection method, validators are selected by searching for nodes with a combination of the lowest hash value and the highest stake. Since the stake size is public, the next forger can usually be predicted by other nodes.
Coin Age Selection
The age coin selection method chooses nodes based on how long they have been staking their tokens. Coin age is calculated by multiplying the number of days the coins have been staked by the number of coins staked.
When a node has forged a block, the age of its coins is reset to zero, and the node must wait a certain amount of time before being able to forge another block, this prevents nodes with large stakes from dominating the blockchain.
Validate transactions
Each cryptocurrency that uses the Proof of Stake algorithm has its own set of rules and methods, combined into what it considers the best option for the network and its users.
When a node is chosen to forge the next block, it will check if the transactions in the block are valid. You will then sign the block and add it to the blockchain. As a reward, the node receives the block transaction fees and, in some blockchains, a coin reward.
If a node wishes to stop being a forger, its stake and earned rewards will be released after a certain time, giving the network time to verify that the node has not added fraudulent blocks to the blockchain.
Which blockchains use Proof of Stake?
Most blockchains after Ethereum use Proof of Stake consensus mechanisms. Normally, each one is modified to adapt to the needs of the network. We will discuss these variations later in the article. Even Ethereum is transitioning to Proof of Stake with Ethereum 2.0.
These are some of the blockchain networks that use Proof of Stake or a variation of it:
1. BNB Chain
2. BNB Smart Chain
3. Solana
4. Avalanche
5. Polka dots
Advantages of Proof of Stake
Proof of Stake has many clear advantages over Proof of Work. For this reason, new blockchains almost always use Proof of Stake. These are some of its advantages:
Adaptability
As user needs and blockchains change, so can Proof of Stake. It is evident when you look at the large number of adaptations available. The mechanism is versatile and can be easily adapted to most blockchain use cases.
Decentralization
More users are encouraged to run nodes as it is more affordable. This incentive and the randomization process also make the network more decentralized. Although staking pools exist, the probability of an individual successfully forging a block under Proof of Stake is much higher. Overall, this reduces the need for staking pools.
Energy efficiency
Proof of Stake is much more energy efficient than Proof of Work. The cost of participation depends on the economic cost of staking coins, rather than the computational cost of solving puzzles. This mechanism leads to a significant reduction in the energy required to execute the consensus mechanism.
Scalability
Since Proof of Stake does not rely on physical machines to generate consensus, it is more scalable. There is no need for large mining farms or stocking up on energy supplies. Adding more validators to the network is cheaper, simpler and more accessible.
Security
Staking works as a financial motivation element to prevent the validator from processing fraudulent transactions. If the network detects a fraudulent transaction, the validator will lose a portion of their stake and their right to participate in the future. As long as the stake is higher than the reward, the validator will lose more coins than they would earn through fraudulent activities.
To achieve effective control of the network and approve fraudulent transactions, a node would have to possess a majority stake in the network, also referred to as a 51% attack. Depending on the value of a cryptocurrency, it may be virtually impossible to acquire control of the network, as you would have to acquire 51% of the circulating supply.
However, this can also be a disadvantage, which we will explain below.
Disadvantages of Proof of Stake
Although Proof of Stake has many advantages over Proof of Work, it also has some weaknesses:
Forking
In a standard Proof of Stake mechanism, there is nothing that prevents mining from both sides of a fork. With Proof of Work, mining both sides would lead to wasted energy. With Proof of Stake, the cost is much lower, meaning people can "bet" on both sides of a fork.
Accessibility
To start staking, you need a supply of native blockchain tokens. This forces you to purchase the token through an exchange or another method. Depending on the amount needed, you may need to make a significant investment to start staking effectively.
In the case of Proof of Work, you can buy cheap mining equipment or even rent it. With such teams you can join a pool and start validating and making profits quickly.
51% Attack
While Proof of Work is also prone to 51% attacks, these can be significantly easier with Proof of Stake. If the price of a token collapses or the blockchain has a low market capitalization, it can theoretically be cheap to buy more than 50% of the tokens and control the network.
Proof of Work vs. Proof of Stake
When we compare the two consensus mechanisms, we see that there are some fundamental differences.
However, there is a wide variety of Proof of Stake mechanisms on different blockchains. Many differences depend on the exact mechanism used.
Other consensus mechanisms based on Proof of Stake
Proof of Stake is very adaptable. Developers can change the exact mechanism to suit a blockchain's specific use cases. Below we present some of the most common.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake allows users to stake coins without becoming validators. In this case, they stake a validator to share the block rewards. The more delegators stake a potential validator, the higher the probability of selection. Generally, validators can change the amount shared with delegators as an incentive. The reputation of a validator is also an important factor for delegators.
Nominated Proof of Stake (NPoS)
Nominated Proof of Stake is a consensus model developed by Polkadot. It shares many similarities with Delegated Proof of Stake, but also one key difference. If a nominator (delegator) stakes for a malicious validator, they may also lose their stake.
Nominators can choose to stake up to 16 validators. The network will then proceed to equitably distribute its stake in favor of the chosen validators. Polkadot also uses various game theory and choice theory approaches to determine who will forge a new block.
Proof of Staked Authority (PoSA)
BNB Smart Chain uses Proof of Staked Authority to generate 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 eligible to participate, selected by the amount of BNB they have staked or that has been delegated to them. This set is determined daily, and BNB Chain stores the selection.
Conclusion
The way we add blocks of transactions to a network has changed significantly since Bitcoin. There is no longer a need to rely on computing power to generate crypto consensus. The Proof of Stake system has many advantages, and history has proven that it works. As time goes on, Bitcoin will be one of the few Proof of Work networks left. For now, it looks like Proof of Stake is here to stay.
