TL;DR

Proof of Stake is a popular consensus mechanism used as an alternative to Proof of Work. Instead of using computational power, validators stake coins to validate transactions. This drastically reduces the energy consumption required. Proof of Stake also offers improvements in terms of decentralization, security, and scalability.

However, without access to cryptocurrencies, using Proof of Stake may be less accessible. Furthermore, there is the potential for a 51% attack on low-market capitalization blockchains. Because Proof of Stake is highly versatile, it has a wide range of variations for different blockchains and use cases.

Introduction

Proof of Stake is by far the most popular choice for blockchain networks these days. But with so many variations, it can be difficult to understand its core concepts. You’re unlikely to see it in its original form these days. However, all types of Proof of Stake use the same core concepts. Understanding these concepts will help you make better choices about the blockchains you use and how they work.

What is Proof of Stake?

The Proof of Stake consensus algorithm was introduced in 2011 on the Bitcointalk forum. It was proposed as a solution to the problems of Proof of Work. While both algorithms aim to achieve blockchain consensus, the process they adopt is quite different. With Proof of Stake, instead of providing proof through a computationally intensive method, participants simply prove that they have staked coins.

How does Proof of Stake work?

The Proof of Stake algorithm uses a process that pseudo-randomly selects a group of validators from a group of nodes. The system uses a combination of factors, including the staking time, an element of randomization, and the value (wealth) of the node.

In Proof of Stake systems, blocks are "forged" rather than mined. However, you may still hear the term "mined" occasionally. Most Proof of Stake cryptocurrencies launch with a "pre-forked" supply of coins to allow nodes to start up immediately.

Users participating in the “forging” process must lock a certain amount of coins into the network as stake. The size of the stake determines the chances of a node being selected as the next validator - the higher the stake, the higher the chances. Some unique methods are added to the selection process to avoid favoring the wealthiest nodes in the network. The two most commonly used methods are Randomized Block Selection and Coin Age Selection.

Randomized Block Selection

In Randomized Block Selection, validators are selected by nodes with a combination of the lowest hash value and the highest stake value. Since stake sizes are public, other nodes can usually predict who the next “forger” will be.

Coin Age Selection

The Coin Age Selection method selects nodes based on the staking time of their tokens. The Coin Age parameter is calculated by multiplying the number of staking days by the number of staked coins.

After forging a block, the node's Coin Age is reset to zero and the node must wait a period of time to forge another block - this prevents nodes with large amounts of stake from dominating the blockchain.

Transaction validation

Each cryptocurrency uses its own Proof of Stake algorithm and has its own set of rules and methods to provide the best possible combination of resources for the network and its users.

When a node is chosen to forge the next block, it will verify that the transactions in the block are valid. It will then sign the block and add it to the blockchain. As a reward, the node receives the block’s transaction fees and, on some blockchains, a coin reward.

If a node wants to abandon its role as a "forger", its staked value and the rewards obtained will be released after a certain period of time. This gives the network enough time to verify that the respective node has not added fraudulent blocks to the blockchain.

Which blockchains use Proof of Stake?

Most post-Ethereum blockchains use the Proof of Stake consensus mechanism. Typically, each blockchain makes its own modifications to suit the needs of the network. We will discuss the modifications in more detail later in this article. Currently, Ethereum itself is in the process of switching to Proof of Stake with the Ethereum 2.0 update.

Blockchain networks that use Proof of Stake or a variation of it include:

1. BNB Chain

2. BNB Smart Chain

3. Solana

4. Avalanche

5. Polka dots

Vantagens do Proof of Stake

Proof of Stake offers many advantages over Proof of Work. For this reason, new blockchains almost always use Proof of Stake. Some of the advantages include:

Adaptability

As user needs and blockchains change, so does Proof of Stake. This is evident in the large number of adaptations available. The mechanism is versatile and can easily adapt to most blockchain use cases.

Decentralization

More users are incentivized to run nodes as it is a more accessible task. This incentive and the randomization process also increase the decentralization of the network. While staking pools exist, with Proof of Stake, the validator has a much higher chance of successfully “forging” a block. Overall, this reduces the need for staking pools.

Energy efficiency

Compared to Proof of Work, Proof of Stake is incredibly energy efficient. The cost of participation depends on the cost of staking coins, not the cost of computing power to solve problems. This consensus mechanism provides a significant reduction in the energy required to execute.

Scalability

Since Proof of Stake does not rely on physical machines to achieve consensus, its system offers more scalability. There is no need for large mining farms or large power supplies. Adding more validators to the network is cheaper, simpler, and more accessible.

Security

Staking works as a financial incentive for the validator not to process 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 network. Therefore, if the staked amount is greater than the rewards earned, the validator has no reason to act maliciously (they would lose more money).

To effectively control the network and approve fraudulent transactions, a node would need a majority stake in the network. This type of scam is known as a 51% attack. Depending on the value of a cryptocurrency, it can be virtually impossible to gain control of the network, as it would require acquiring 51% of the entire circulating supply.

However, this can also represent a disadvantage which we will explain below.

Disadvantages of Proof of Stake

Although Proof of Stake has many advantages compared to Proof of Work, it still has some negative aspects:

Forking

With the standard Proof of Stake mechanism, there is no disincentive to mining on both sides of a fork. In Proof of Work, mining on both sides wastes energy. In Proof of Stake, the cost is much lower, meaning users can “bet” on the success of both sides of the fork.

Accessibility

To stake, you need a supply of the blockchain's native token. This means you'll need to purchase the token from an exchange or through another method. Depending on the minimum amount required, you may need a significant investment to stake effectively.

With Proof of Work, you can rent or buy cheap mining equipment. This way, you can join a pool, start validating transactions, and start earning quickly.

51% Attack

While it is technically possible to perform a 51% attack on a Proof of Work network, this type of attack is significantly more likely on Proof of Stake systems. If the price of a token drops significantly or the blockchain has a low market capitalization, the amount required to purchase more than 50% of the network’s tokens will be relatively lower. In this case, the would-be buyer would have control over the network.

Proof of Work vs. Proof of Stake

When comparing the two consensus mechanisms, there are some fundamental differences.

However, there are a wide variety of Proof of Stake mechanisms in blockchains. Depending on the mechanism, there will be variation in relation to the differences mentioned.

Other consensus mechanisms based on Proof of Stake

Proof of Stake is highly adaptable. Developers can modify the mechanism to suit a blockchain's specific use cases. Below are some of the most common ones.

Delegated Proof of Stake (DPoS)

Delegated Proof of Stake allows users to stake coins without having to become a validator. In this case, users stake on behalf of a validator and share block rewards. The more “delegator” users stake on behalf of a potential validator, the higher their chance of being selected to validate a block. Validators can usually change the amount shared with delegators by setting a reward as an incentive. A validator’s reputation is also an important factor for delegators.

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 there is one key difference. If a nominator (delegator) stakes on behalf of a malicious validator, they can also lose their staked assets.

Nominators can choose up to 16 validators to stake. The network will evenly distribute their staked value among the chosen validators. Polkadot also uses various game theory and election system approaches to determine who will forge a new block.

Proof of Staked Authority (PoSA)

The 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 creating new blocks. A pool of 21 active validators is eligible to participate. They are selected based on the amount of BNB they have staked (or the amount delegated on their behalf). This pool is determined daily, and the BNB Chain records and stores this selection.

Conclusion

Since the creation of Bitcoin, the way we add blocks of transactions to a network has changed significantly. We no longer rely on computing power to achieve cryptographic consensus. Proof of Stake has many advantages and has been proven to work historically. It seems likely that over time, Bitcoin will be one of the few remaining Proof of Work networks. So far, it seems that Proof of Stake is here to stay.