What is Proof of Stake in Blockchain

Verifying transactions is a key component in cryptocurrency, vital for maintaining security, efficiency, and trust within the system. While Proof of Work (PoW) was traditionally the norm and was synonymous with Bitcoin, an innovative approach gained more traction, which is Proof of Stake (PoS) in Blockchain. As an efficient alternative to secure transactions, PoS is becoming the new norm. This article explores what Proof of Stake is, its operational mechanics, and its potential. 

Proof of Stake is a consensus mechanism similar to how a community garden works. Here, members contribute seeds (or resources) to earn the right to harvest crops. In cryptocurrency, the mechanism allows blockchains to validate transactions without relying on the energy-intensive process used in Proof of Work. Instead of miners who solve complex mathematical puzzles, PoS uses validators (those who lock up their tokens) and "stake" their cryptocurrency as collateral to show proof they are part of the community. This staking process involves locking up a certain amount of digital currency for a chance to earn rewards by validating a transaction block. 

Validators are selected based on how many coins they own and are ready to lock up as security. This encourages them to keep the network honest because they could lose their coins if they cheat. The more coins they stake, the better their chances of being chosen to check transactions. This creates a fair and energy-saving system. 

In PoS, blockchain participants are referred to as validators. Validators stake their crypto by locking it up in a smart contract on the blockchain, and once selected, the validator checks the transactions, creates a new block, and adds it to the blockchain. 

If a validator proposes a fraudulent transaction, they risk losing part or all their staked tokens, which is called slashing a token. As a result, the blockchain staking ecosystem ensures every validator is motivated to act in the network's best interest. After validating a block, the validator receives rewards, usually transaction fees or newly minted cryptocurrency. 

Mining in PoS doesn't require the physical equipment or power usage seen as in Proof of Work. The only requirement is for validators to lock their assets in the wallet - and validation depends on their stake. The more tokens they have "locked" in their staking wallet, the more likely they will be selected as validators. This staking method is a lot less energy-intensive, making PoS a greener alternative to PoW. 

While it's possible for anyone staking crypto to be chosen as a validator, the chances are significantly lower if they only stake a small amount. Even during the early stages of the Ethereum 2.0 transition, requirements were too high for many to solo stake, which led to the popularity of staking pools- where smaller holders can combine their staked crypto for a better chance at being chosen and then share the rewards - like Proof of Work. 

Proof of Stake and Proof of Work consensus mechanisms have similar goals, such as validating transactions. However, the way they ensure transactions are verified and added to the network varies significantly. 

Used by Bitcoin and Ethereum (until the recent switch to PoS), PoW relies on miners who solve complex problems with high-powered computers. This process is energy-intensive and has been criticized for its environmental impact. It's been around longer and is often considered more secure. 

Conversely, PoS is a more energy-efficient way of launching and sustaining a network since it doesn't require high-powered computing; instead, it selects validators based on their staked crypto. This makes it more energy-efficient and accessible. Ethereum is now fully PoS, and many newer cryptocurrencies use PoS for its lower environmental impact and ease of participation. 

Bitcoin and the early days of cryptocurrencies began with Proof of Work (PoW), the only way to validate transactions. The first instance of proof of stake in blockchain was Peercoin, which introduced its PoS mechanism in 2012. However, it wasn't until early Gen 2.0 protocols implemented PoS to help scale transactions and support smart contracts. 

Today, nearly all tokens use PoS due to their ease of deployment, faster transaction processing, and improved scalability for blockchains. Numerous cryptocurrencies have adopted PoS, including Ethereum, which we will discuss later, leveraging its advantages for greater efficiency and sustainability. Notable examples include Cardano, Tezos, and Polkadot. Since we referenced Cardano multiple times, we have noticed that it uses a unique PoS protocol called Ouroboros, focusing on security and energy efficiency. 

Today, nearly all new tokens and blockchain protocols rely on Proof of Stake or a similar iteration built for their needs. 

Since there's no bulletproof protocol immune to attacks, Proof of Stake offers several security advantages. Its reliance on financial incentives encourages validators to act honestly, as they risk losing their locked tokens for malicious behavior. Additionally, the decentralized nature of PoS makes it challenging for a single entity to gain control over the network. 

Proof of Stake is not without vulnerabilities, and one possible thread is a 51% attack - which also applies to PoW protocols. In such a case, an entity controls over half of the network's stake assets and manipulates transactions to validate others. Fortunately, such attacks are costly and challenging to execute, making them less likely in well-established networks. 

A 51% attack occurs when an individual or group gains control over 51% of a network's staked coins, allowing them to alter transactions, double-spend coins, or prevent new transactions from being confirmed. This type of attack poses a significant threat to any blockchain. However, for 51% to take place, a large number of tokens are required to cover over 51% of staked tokens in circulation. 

In a PoS network, the financial requirements for executing a 51% attack are typically higher than in a PoW system. This is because acquiring more than half of the network's staked coins requires substantial investment, making it impractical for most would-be attackers. 
Even so, the risk of a 51% attack serves as a reminder of the importance of decentralization and the ongoing need for improvements in blockchain security. 

Pros 

• Energy-Efficient: Unlike Proof of Work, PoS doesn't rely on high-powered machines to solve complex math problems, drastically reducing energy consumption compared to networks like Bitcoin. 
• Lower Barriers to Entry: PoS allows anyone with a wallet and some tokens to participate, eliminating the need for costly hardware and making the network more accessible. 
• Enhanced Scalability: PoS can handle a larger number of transactions, providing a pathway to greater scalability and allowing blockchains to grow without compromising speed or efficiency. 

Cons 

• Potential for Centralization: Validators with substantial stakes may gain disproportionate influence, concentrating power in fewer hands. 
• Risk of Slashing: Validators who validate incorrect or fraudulent data risk losing part or all of their staked cryptocurrency, potentially leading to a significant financial penalty. 

Ethereum's transition to PoS, known as ETH 2.0, represents a significant milestone for the blockchain industry. By replacing PoW with PoS, Ethereum aimed to improve scalability, security, and sustainability. 

In the PoS model, validators were required to stake 32 ETH to participate in transaction validation, where the network randomly selects validators to propose and attest to blocks. As a result, Ethereum sought to ensure decentralization and fairness by rewarding users for their efforts and ensuring the blockchain remains relevant to the industry. 

ETH 2.0 also introduces sharding, a scaling solution that divides the blockchain into multiple shard chains, increasing transaction capacity without sacrificing security. This innovative approach allows Ethereum to increase its capacity to process various transactions without endangering the network's security. 

Proof of stake in blockchain has helped transform the entire industry. When we look at how Proof of Stake and Proof of Work compare to one another, it's evident that the former has more advantages. As with any protocol, new users aren't preoccupied with how transactions are verified but rather with how quick and secure the network is. 

As PoS gains traction, you can easily identify how most top cryptocurrencies rely on the mechanism to ensure faster transactions, provide a greener alternative, and help scale the entire cryptocurrency industry. And currently, PoS could drive the future of the currency for years to come. 

Further Readings

• Similarities & Differences between the Proof of Stake Implementations
• Proof of Stake (POS) vs Proof of Work (POW)
• Ethereum Transition: Impact and Significance