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. In this article, we will explore how does Proof of Stake work and its disadvantages.
Proof of Stake Meaning
The Proof of Stake consensus algorithm was introduced back in 2011 on the Bitcointalk forum when it was proposed as a solution to Proof of Work's problems. While they both share the same goal of reaching blockchain consensus, the process they take is quite different. Rather than the need to provide a computationally intensive proof, participants only have to prove they have staked coins.
How Does Proof of Stake Work?
The Proof Of Stake algorithm uses a pseudo-random election process to select validators from a group of nodes. The system uses a combination of factors, including staking age, an element of randomization, and the node's wealth.
In Proof of Stake systems, blocks are 'forged' rather than mined. However, you might still hear the term 'mined' occasionally used. Most Proof of Stake cryptocurrencies launch with a supply of 'pre-forged' coins to allow nodes to start immediately.
Users participating in the forging process must lock a certain amount of coins into the network as their stake. The stakes' size determines the chances for a node to be selected as the next validator - the bigger the stake, the greater the chances. Unique mETHods are added into the selection process to favor not just the wealthiest nodes in the network. The two most commonly used methods are Randomized Block Selection and Coin Age Selection.
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.
Validating Transactions
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.
When a node gets chosen to forge the next block, it will check if the transactions in the block are valid. It then signs the block and adds it to the blockchain. As a reward, the node receives the transaction fees from the block and, on some blockchains, a coin reward.
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.
Examples of Blockchains that use Proof of Stake
Most blockchains post-ETHereum use Proof of Stake consensus mechanisms. Typically, each one is modified to suit the needs of the network. At the time of writing, Ethereum itself is currently in the process of moving to Proof of Stake with Ethereum 2.0.
Blockchain networks that use Proof of Stake or a form of it include:
1. BNB Chain
2. BNB Smart Chain
3. Solana
4. Avalanche
5. Polkadot
Proof of Stake Advantages
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:
Adaptability
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.
Decentralization
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.
Energy Efficiency
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.
Scalability
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.
Security
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.
To effectively control the network and approve fraudulent transactions, a node would have to own a majority stake in the network, also known as the 51% attack. Depending on the value of a cryptocurrency, it can be almost impossible to gain control of the network, as you would need to acquire 51% of the circulating supply.
However, this can also be a disadvantage which will be explained below.
Proof of Stake Disadvantages
Although Proof of Stake has many advantages compared to Proof of Work, it still has some weaknesses:
Forking
With a standard Proof of Stake mechanism, there's no disincentive for mining both sides of a fork. Under Proof of Work, mining both sides will lead to a waste of energy. With Proof of Stake, the cost is much less, meaning that people can "bet" on both sides of a fork.
Accessibility
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.
51% attack
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.
Closing Thoughts
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 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. Thus, learning how does Proof of Stake work will put you at the forefront of understanding blockchain technology.
