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 energy consumption needed. Proof of Stake also improves decentralization, security, and scalability.
However, Proof of Stake can be less accessible to get in without access to crypto. A 51% attack can also be easy to achieve with low market cap blockchains. As Proof of Stake is highly versatile, it has a wide range of variations for different blockchains and use cases.
Proof of Stake is by far the most popular choice for blockchain networks today. But with so many variations, it can be tricky to understand its core concepts. Nowadays, you're unlikely to see it in its original form. Nevertheless, all kinds of Proof of Stake share the same key core concepts. Understanding these similarities will help you make better choices about the blockchains you use and how they operate.
What does Proof of Stake mean?
How does Proof of Stake work?
Randomized Block Selection
In the Randomized Block Selection method, the validators are selected by looking for nodes with a combination of the lowest hash value and the highest stake. Since the sizes of stakes are public, the next forger can usually be predicted by other nodes.
Coin Age Selection
The Coin Age Selection method chooses nodes based on how long their tokens have been staked. Coin age is calculated by multiplying the number of days the coins have been staked by the number of coins staked.
Once a node has forged a block, its coin age is reset to zero, and it must wait a certain period to be able to forge another block - this prevents large stake nodes from dominating the blockchain.
Each cryptocurrency using a Proof of Stake algorithm has its own set of rules and methods combined for what it thinks is the best possible combination for the network and its users.
If a node wants to stop being a forger, its stake and earned rewards will be released after a certain period, giving the network time to verify that there are no fraudulent blocks added to the blockchain by the node.
Which blockchains use Proof of Stake?
Blockchain networks that use Proof of Stake or a form of it include:
1. BNB Chain
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. Its benefits include:
As users' needs and blockchains change, so can Proof of Stake. It's plain to see this with the vast number of adaptations available. The mechanism is versatile and can easily fit most blockchain use cases.
More users are encouraged to run nodes since it's more affordable. This incentive and the randomization process also make the network more decentralized. Although staking pools exist, there is a much higher chance for an individual to forge a block under Proof of Stake successfully. Overall, this reduces the need for staking pools.
Proof of Stake is incredibly energy efficient compared to Proof of Work. The cost of participating relies 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 run the consensus mechanism.
As Proof of Stake doesn't rely on physical machines to generate consensus, it's more scalable. There's no need for huge mining farms or sourcing large energy supplies. Adding more validators to the network is cheaper, simpler, and more accessible.
Staking works as a financial motivator for the validator not to process fraudulent transactions. If the network detects a fraudulent transaction, the validator will lose a part of its stake and its right to participate in the future. So as long as the stake is higher than the reward, the validator would lose more coins than it would gain with fraudulent activity.
However, this can also be 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 weaknesses:
To begin staking, you'll need a blockchain's native token supply. This requires you to purchase the token via an exchange or other method. Depending on the amount required, you may need a significant investment to begin staking effectively.
With Proof of Work, you can buy cheap mining equipment or even rent it. With this, you can join a pool and start validating and earning quickly.
While Proof of Work is also prone to 51% attacks, they can be significantly easier with Proof of Stake. If a token's price crashes or the blockchain has a low market capitalization, it can be theoretically cheap to purchase more than 50% of the tokens and control the network.
Proof of Work vs. Proof of Stake
When we compare the two consensus mechanisms, there are a few core differences.
Proof of Work (PoW)
Proof of Stake (PoS)
Minimal amount or none
Staking of coins
However, there's a wide variety of Proof of Stake mechanisms across blockchains. Many differences will depend on the exact mechanism used.
Other consensus mechanisms that build on Proof of Stake
Proof of Stake is highly adaptable. Developers can change the exact mechanism to suit a blockchain's specific use cases. Below are some of the most commonly seen
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake allows users to stake coins without becoming a validator. In this case, they stake them behind a validator to share in the block rewards. The more delegators stake behind a possible validator, the greater its selection chance. Validators can usually change the amount shared with delegators as an incentive. A validator's reputation is also an important factor for delegators.
Nominated Proof of Stake (NPoS)
Nominators can choose up to 16 validators to stake behind. The network will then equally distribute their stake behind the chosen validators. Polkadot also uses several approaches in game theory and election theory to determine who will forge a new block.
Proof of Staked Authority (PoSA)
The way we add blocks of transactions to a network has changed significantly since Bitcoin. We now no longer need to rely on computing power to generate crypto consensus. The Proof of Stake system has many advantages, and history has shown that Proof of Stake works. As time goes on it, it looks like Bitcoin will be only one of a handful of Proof of Work networks left. For now, it seems that Proof of Stake is here to stay.