Summary
Proof of Stake is a popular alternative to Proof of Work. Instead of requiring computational power to verify transactions, validators must stake tokens, which greatly reduces the required energy consumption. Proof of Stake also improves decentralization, security, and scalability.
However, it is difficult to get access to proof of stake without access to cryptocurrency. If you choose a blockchain with a lower market cap, it is also prone to 51% attacks. Because proof of stake is highly versatile, it also has many variations that are suitable for different blockchains and use cases.
Introduction
Proof of Stake is currently the most popular choice for blockchain networks. But because there are so many variations, it can be difficult to understand the core concepts. You are unlikely to see it in its original form today. However, all versions of Proof of Stake share the same core concepts. Understanding these similarities will help you make a better choice about which blockchain to use and how they operate.
What is Proof of Stake?
The Proof of Stake consensus algorithm was introduced in 2011 through the Bitcointalk forum to solve the problems with Proof of Work. Although both algorithms have the same goal of reaching blockchain consensus, the process of achieving the goal is very different. Participants do not need to provide computationally intensive proofs, but only need to prove that they have staked tokens.
How does Proof of Stake work?
The proof-of-stake algorithm uses a pseudo-random election method to select validators from a group of nodes. This system takes into account a variety of factors, including stake age (a randomization element) and node wealth.
In a proof-of-stake system, blocks are “forged” rather than mined. However, you may occasionally hear the word “mining” mentioned. Most proof-of-stake cryptocurrencies launch with a supply of “pre-forged” tokens to start a node right away.
Users who participate in the forging process must lock a certain amount of tokens into the network as their stake. The size of the stake determines the chance of selecting a node as the next validator, and the greater the stake, the greater the chance. To ensure that the process is not only biased towards the richest nodes in the network, this selection process adds a lot of special methods. The two most commonly used methods are "Randomized Block Selection" and "Coin Age Selection".
Random block selection
In the random block selection method, validators are chosen by looking for the node with the lowest hash and highest stake combination. Since the size of the stake is public, other nodes can usually predict the next forger.
Coin age selection
The coin age selection method selects nodes based on the length of time the token is staked. The coin age is calculated by multiplying the number of days the token is held as equity by the number of tokens staked.
When a node forges a block, its coin age is reset to zero and it must wait a period of time before forging another block, which helps prevent nodes with large stakes from dominating the blockchain.
Verifying transactions
Each cryptocurrency that uses the proof-of-stake algorithm provides what it believes is the best combination of rules and methods for the network and its users.
If a node is selected to forge the next block, it will check whether the transactions in the block are valid. Then, it will sign the block and add it to the blockchain. The node will receive transaction fees from the block as a reward, and in some blockchains, it will also receive token rewards.
If a node no longer wants to be a forger, the network will verify whether the node has added false blocks to the blockchain. If the verification is correct, the node's rights and earned rewards will be released after a period of time.
Which blockchains use Proof of Stake?
Most blockchains after Ethereum use a proof-of-stake consensus mechanism. Often, these mechanisms are modified to suit the needs of the network. We will cover these changes later in this article. Ethereum itself is currently moving to proof-of-stake with Ethereum 2.0.
Blockchain networks that use proof of stake or its related forms include:
1. Binance Coin (BNB) Chain
2. Binance Coin (BNB) Smart Chain
3. Solana
4. Avalanche
6. Polkadot
Advantages of Proof of Stake
Proof of Stake has significant advantages over Proof of Work. Because of this, new blockchains almost always use Proof of Stake. Its advantages include:
Adaptability
As user needs and blockchains change, proof of stake will change as well. This is clear from the numerous debugged applications we have seen. The mechanism is generic and can be easily adapted to most blockchain use cases.
Decentralization
A large number of users are encouraged to run nodes because this method is more economical. This incentive and randomization process improves the decentralization of the network. Although there are staking pools, the probability of an individual successfully forging a block based on the proof-of-stake mechanism is much higher. Overall, this reduces the need for staking pools.
energy efficiency
Compared to proof of work, proof of stake is extremely energy efficient. The cost of participating is determined by the economic cost of staking tokens rather than the computational cost of solving the puzzle. This mechanism results in significantly less energy required to run the consensus mechanism.
Scalability
Since proof of stake does not rely on physical machines to generate consensus, it is more scalable. It does not require huge mining farms or large amounts of energy to purchase. Adding more validators to the network is cheaper, simpler, and easier to implement.
safety
Stake acts as a financial incentive for validators to not process fake transactions. If the network detects a fake transaction, the validator loses part of their stake and the right to participate in future events. Therefore, as long as the stake is higher than the reward, the validator will lose more tokens than the reward if they attempt to commit fraud.
To effectively control the network and approve false transactions, the nodes would have to have a majority stake in the network, also known as a 51% attack. Depending on the value of the cryptocurrency, gaining control of the network would require obtaining 51% of the circulating supply, which is almost impossible to achieve.
However, this can also be a disadvantage, as we will explain below.
Disadvantages of Proof of Stake
Although Proof of Stake has many advantages over Proof of Work, it still has some disadvantages:
Fork
Using standard proof-of-stake mechanisms does not curb mining on both sides of the fork. When using proof-of-work, mining both sides results in a waste of energy. With proof-of-stake, costs are significantly reduced, meaning people can “bet” on both sides of a fork.
Accessibility
To start staking, you need a supply of the blockchain’s native tokens. This requires you to purchase tokens through an exchange or other means. Depending on the quantity required, you may need to invest a large amount to effectively start staking.
With Proof of Work, you can buy cheap mining equipment or even rent it. This allows you to join a mining pool and quickly start validating and earning rewards.
51% Attack
While proof of work is also vulnerable to a 51% attack, it is significantly easier with proof of stake. If the price of a token collapses or the market cap of the blockchain is low, it could theoretically be cheaper to buy more than 50% of the tokens and control the network.
Proof of Work vs. Proof of Stake
If we compare the two consensus mechanisms, we can see some key differences.
However, there are a variety of proof-of-stake mechanisms across different blockchains. Many of the differences depend on the exact mechanism used.
Other consensus mechanisms based on proof of stake
Proof of Stake is highly adaptable. Developers can tweak the exact mechanism to fit the blockchain’s specific use case. Here are a few of the most common mechanisms:
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake allows users to stake tokens without becoming a validator. In this case, they can stake with the validator to share the block rewards. The more delegators behind a potential validator, the greater the chance of selection. Validators can usually change the amount they share with delegators as a reward. The reputation of the validator is also an important factor in the delegator's choice.
Nominated Proof of Stake (NPoS)
Nominated Proof of Stake is a consensus model developed by Polkadot. It has many similarities to Delegated Proof of Stake, but with one key difference. If a nominator (delegator) stakes with a malicious validator, they may also lose their stake.
Nominators can select up to 16 validators to stake with them. The network will then evenly distribute their staked stakes behind the selected validators. Polkadot also uses several methods from game theory and election theory to decide who will forge new blocks.
Proof of Stake Authority (PoSA)
The Binance Coin (BNB) Smart Chain uses Proof of Authority (PoA) to generate network consensus. This consensus mechanism combines PoA and PoA into one, allowing validators to take turns forging blocks. A set of 21 active validators that are eligible to participate are selected based on the amount of BNB staked by the validator or delegated behind it. This set is determined daily, and the BNB chain stores the selection.
in conclusion
The way we add blocks of transactions to the network has changed significantly since Bitcoin. We no longer need to rely on computing power to generate cryptocurrency consensus. Proof of Stake systems have many advantages and history has proven that proof of stake works. As time goes by, Bitcoin seems to be one of the few remaining proof-of-work networks. For now, it seems that proof of stake is here to stay.
