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Proof of Stake (PoS) is a consensus mechanism some cryptocurrencies use to confirm transactions, create new blocks, and secure them. Instead of using powerful computers to solve cryptographic puzzles, like in Proof of Work (PoW), Proof of Stake allows people who own cryptocurrencies to participate in confirming transactions. If the validators hold or stake more, their chance of getting selected significantly increases, without the need for extensive computational power and energy consumption. PoS is developed to make the network energy-efficient, scalable, and secure.
To understand Proof of Stake, it helps to first look at Proof of Work, as Proof of Stake was created as an alternative to the original Proof of Work mechanism to improve its limitations.
What is Proof of Work (PoW)?
In Proof of Work, “miners” use powerful computers to solve complex puzzles. Once they solve it, they get to add a “block” of transactions to the blockchain and are rewarded with cryptocurrencies. The system is considered secure as solving the puzzle requires time and computing power, making it difficult to cheat. However, miners should invest in high-end devices for mining and incur heavy energy charges, making it expensive. To address these issues of energy-intensive mining, Proof of Stake was created.
What is Proof of Stake (PoS)?
Proof of Stake relies on validators, who are chosen randomly and are willing to hold or stake more coins as collateral. Once validators are chosen, they confirm transactions. Then they add the transaction to the blockchain and earn a reward. When they stake their coins, put their assets at risk, which functions as a financial incentive to validate transactions. In case of an attempt to fraudulent transaction, they risk losing their coins.
- Staking: Investors lock up a specific amount of cryptocurrency in a smart contract to participate in the validation process. Being chosen as a validator depends on the amount of staked cryptocurrency.
- Validator Selection: Validators are selected randomly with respect to their stake. This selection can be influenced by the size and duration of the stake. Staking more coins increases your chance of getting selected.
- Validation and Block Creation: Once chosen, the validator confirms transactions and creates a new block. Factors like the number and time, the coins were staked can influence the selection.
- Reward Distribution: After successfully validating transactions, the validator receives a reward in the form of additional cryptocurrency. This incentivization keeps validators to act honestly and continue staking.
- Slashing: If validators attempt to act maliciously, they are penalized. This penalty results in the loss of some or all of the validator’s staked cryptocurrency.
Popular Blockchains Using Proof of Stake
Several prominent blockchain networks use Proof of Stake due to its advantages, here is a look at a few notable examples:
- Ethereum: The second-largest blockchain by market cap, shifted from PoW to PoS with its Ethereum 2.0 upgrade, The Merge, in 2022. This significantly reduced its energy consumption and opened new staking opportunities for ETH holders.
- Cardano: It uses a PoS consensus mechanism called Ouroboros, making it one of the first major blockchains to adopt an eco-friendly option.
- Polkadot: By combining decentralization with security, it uses a PoS model called “Nominated Proof of Stake” (NPoS). The nominators are backed by their individual stakes.
- Tezos: It uses a PoS system where participants can “delegate” their tokens to a validator, allowing them to earn without running a full node. This encourages staking without any technical expertise.
Proof of Stake vs Proof of Work: how are they different?
While both help to validate transactions and secure networks, each of the algorithms has different approaches:
| Feature | Proof of Stake | Proof of Work |
|---|---|---|
| Feature | Proof of Stake | Proof of Work |
| Mechanism | Validators are selected for the number of coins staked | Miners solve computational puzzles to validate transactions |
| Energy Consumption | Low- no mining with minimal energy requirements | High- requires high energy for mining operations |
| Security | Secured by staking collateral, which is lost if rules are broken | Secured by computational power and hash rate |
| Hardware requirements | Requires owning and staking coins, not high-end hardware | Expensive and powerful computers are required |
| Environmental impacts | Lower impacts | High due to intensive energy usage |
| Reward system | Staking and random selection | Earns reward by solving puzzles |
| examples | Ethereum, Cardano | Bitcoin, Litecoin |
Criticisms and Limitations of PoS
While PoS has many benefits, it also has some criticisms:
- Wealth Concentration: Critics argue that PoS can lead to the concentration of wealth. People with more coins have a higher chance of being selected as validators and earning rewards. Over time, wealthy holders may gain more control over the network.
- Security Concerns: PoS may be vulnerable to certain attacks like “long-range attacks” and “nothing at stake” attacks. Developers have introduced mechanisms like slashing to mitigate these risks, but concerns persist.
- Validator centralization: If large validators dominate staking pools, it might lead to validator centralization. Some networks impose limits on individual staking amounts, but it remains a concern.
- Resilience: PoS is new compared to PoW, so it has not been tested long enough in real-world conditions.
Conclusion
Proof of Stake is an alternative to the energy-intensive PoW, allowing people to “stake” their cryptocurrency to validate transactions. PoS reduces the need for powerful powerful computers and expensive hardware, making it more accessible and environmentally friendly. By requiring participants to stake their coins, PoS ensures that validators receive incentives to maintain the security and accuracy of the network.
However, PoS is not without criticism, it could lead to centralization, wealth concentration, and lack of long-term testing. As blockchain technology continues to evolve, PoS may play a vital role in the future of decentralized networks. With major platforms like Ethereum adopting PoS, it’s clear that the industry sees significant potential in the future.
