Proof of Stake is a class of cryptocurrency consensus mechanisms. It is used to create new blocks in the blockchain and validate new transactions through selected validators.
A consensus mechanism is a way to validate transactions in a distributed ledger and keep it secure. This database ledger is a blockchain. It is a system which allows all the computing systems in a network to agree on which transactions are legitimate. Crypto networks are decentralized, and they are needed to make sure nobody spends the same money twice without the involvement of a centralized agency in between, like Paypal and Visa. Consensus mechanisms like Proof of Work (Pow) and Proof of Stake helps to accomplish this.
Proof of Stake is as an alternative to Proof of Work. Both consensus mechanisms have different approaches to validating the blocks.
Understanding Proof of Stake (PoS)
Poof of Stake is more energy efficient than proof of Work as it reduces the amount of computational Work needed for the verification of new blocks. Proof of Stake is getting increasingly popular as the effect of crypto mining on the planet Earth has been in the limelight.
The Proof of Stake mechanism employs a network of Validators who “stake” their crypto coins to validate a new transaction, update and secure the blockchain and, in return, get rewards. To become a validator, a candidate must stake some crypto coins. Staking is the process of betting crypto coins to become a validator and earn rewards in return ultimately. For instance, Staking in Ethereum requires at least 32 ETH for validation.
A typical PoS workflow
Nodes on a crypto network make transactions.
These nodes stake some crypto coins to become a candidate for validation. It is a process of forging new blocks in the Proof of Stake consensus mechanism.
- An algorithm chooses a validator from the pool of candidate nodes.
- The validators are chosen based on the amount of stake and for how long a candidate stays a validator. To become a validator, you should have some technical knowledge.
- After the selection of a validator, he begins verifying the transaction and publishes the block. While his stake is under lock, the new block gets attestation by other nodes on the network.
- If the block is verified by other nodes, the validator gets his stake back and also gets the reward.
- In case the block is not get proved by other nodes, it is marked as ‘bad’ by the algorithm, and the validator does not get the fee and also loses some of his stake in a process called ‘slashing’.
- After slashing, the process of selecting a validator starts again.
Proof of Stake versus Proof of Work
Various cryptocurrencies, including Ethereum, Tezos, Cardano and Atmos, use Proof of Stake as a consensus mechanism. While Proof of Work is used by Bitcoin, the first cryptocurrency ever invented.
Difference of Approach
In proof of Work, mining is the process of forging new blocks of transactions. Whereas, in Proof of Stake, the process of forging new blocks is ‘validation.’ In mining, the miners solve complex mathematical problems, and it takes a lot of computation power. Whereas, in the validation process, an algorithm selects randomly from a pool of staking candidates.
Proof of Work PoW involves a large amount of computation, so it consumes a very high amount of energy. The Proof of Stake PoS consensus uses considerably low amount of energy. It is because, the network selects validators randomly rather than by solving complex puzzles. Furthermore, the transaction time of PoS is faster than PoW.
In the PoW mechanism, If a group of miners gain 50% control in blocks, they can stop further transactions from confirmation and can double spend the coins.
Whereas in PoS, candidates can only start validation if they have a security amount deposited, i.e. stake. If a validator tries to cheat, he will lose his stake, which is usually a high amount. Therefore, a validator can’t double spend his coin without losing his investment which makes cheating practically unprofitable.
Some Pros and Cons of PoS:
- Proof of Stake employs staking as an alternative to computing problems which makes it more energy efficient.
- It does not require sophisticated and expensive.
- It is quite secure as for an entity to control and alter transactions, it must have 50% of the staked cryptocurrency, making the cheating process very expensive.
- It provides fast transactions.
Though the advantages of PoS are plenty, it also bears some disadvantages.
- Wealthy validators with large holdings would have an excessive impact on verifying new transactions.
- Some proof of Stake cryptocurrencies only allows locking stakes for a certain period.
Due to its plenty of advantages and energy-efficient nature, it will continue to be popular among crypto users. Proof of Stake (PoS) is a relatively new consensus mechanism, and research is going on to further improve and develop it.