What is Proof of Stake?
You might already know that a blockchain is made up of “blocks” that contain digital records of transaction data. Instead of having a centralized authority like a bank validate transaction data, decentralized blockchains rely on algorithms called consensus mechanisms to validate that the transaction data recorded on the blockchain is correct.
Proof-of-Work and Proof-of-Stake are the most widely used algorithms today. This article focuses on Proof-of-Stake and why it is gaining in popularity compared to Proof-of-Work.
Proof-of-Work vs. Proof-of-Stake
In Proof-of-Work, transaction validators (miners), which are usually networks of computers that provide computing power, compete to solve a complex mathematical problem so they can be the first to validate the transactions in the block.
Proof of Stake, on the other hand, requires the validators to stake a certain amount of the blockchain’s native cryptocurrency to earn the right to provide consensus and verify the transactions in the block.
In both cases, validators are incentivized by earning an amount of funds in their respective blockchain’s native token as a reward for their services.
A Closer Look at Proof-of-Stake
Validators stake the native asset of their blockchain to earn the right to verify transactions in the block, and thus partake in the reward. That concept is pretty clear, but what happens when multiple stakers want to verify a block to earn the block reward? If a validator has a higher amount of tokens staked, they have a higher probability of becoming a block validator for a given block.
Once a block validator is chosen, the validator verifies the transaction in the block they were selected to validate. A key point is that the amount of tokens the validator is staking should be more than the amount that the validator would earn as a block reward after validating the block, because the staked tokens are locked during the validation process to further incentivize an quick and accurate validation of the transactions. The block reward for a given block fluctuates with gas prices and block sizes, which is why the reward for some blocks is higher than others.
After the validation process is complete, the block is added to the network and other validators verify the genuineness of the verification of that particular block. After the verification, the block is added to the network permanently.
In cases of incorrect verification, where the data in a block of transactions are not verified correctly, the stake the validator was set to earn would be lost, and a ban would be issued to prevent the validator from participating in future network validations.
Pros and Cons of Proof-of-Stake
A huge benefit of Proof-of-Stake is that it uses considerably less computational power than the Proof-of-Work algorithm, which makes PoS exponentially more energy efficient.
Proof-of-Stake algorithms also scale better, as they can more easily include a higher amount of transactions in the network. As Proof-of-Work miners need more and more computing power to compete for the block reward, another benefit of PoS is that you don’t need heavy computer machinery to be able to become a validator of the network.
Further, PoS mitigates the problem of a hacker or a malicious validator taking control of the blockchain, since it is extremely and impractically expensive for someone to own a majority stake in the network. There is virtually no incentive to try to attack networks of this type, since a huge amount of staked tokens would be forfeited in an attempt to manipulate a block that yields a reward less than the amount the validator staked to begin with.
An underlying doubt about Proof-of-Stake is that it is less tested than Proof-of-Work on various blockchains, which raises uncertainties about problems that might arise in the future. It also raises some concerns about whether or not PoS mechanisms are adequately decentralized, since validators that earn the largest block rewards must by definition hold such a huge amount of staked tokens. The wealthiest validators are often rewarded in this system.
Ethereum and Proof-of-Stake
The migration to Ethereum 2.0 is expected this year, along with the a shift to the Proof-of-Stake consensus algorithm. This means that PoS is about to face its biggest test, as the consensus mechanism for one of the busiest blockchain networks in the world. Ethereum’s shift to Proof of Stake is an excellent test case for the benefits, security, and future of PoS algorithms.