Proof of Stake Explained

Proof of Stake explained

Proof of Stake is a consensus mechanism where cryptocurrency holders can validate block transactions by staking crypto tokens. PoS algorithms aim to solve the challenges that blockchain mining faced with the original Proof of Work consensus mechanism. Today, PoS is a popular topic in the cryptocurrency community, especially considering Etherium’s ongoing transition from Proof of Work to Proof of Stake.

But what’s the logic behind this transition and how can PoS exceed the potential of PoW?

Whare the limitations of PoW?

Proof of Work is the original blockchain consensus mechanism and is at the heart of the creation of Bitcoin – the world’s first crypto that is immutable, decentralized, and resistant to threats. The mechanism worked as it’s a bullet-proof way to provide security and establish trust in a decentralized blockchain. However, it comes with some limitations.

Energy consumption

Because it involves solving complex cryptographic puzzles, the PoW consensus mechanism  requires a substantial amount of computational work, which makes it very energy-intensive. According to Digiconomist, Bitcoin power consumption in 2021 was 204.50 TWh, or equal to the power consumption of Thailand. In terms of carbon footprint, Bitcoin’s was 114.06 Mt CO2 or the same amount as that of the Czech Republic. In a nutshell, this mechanism is not exactly environmentally friendly, nor is it a cheap endeavour. Miners must invest in reliable tech, spend a fortune on setups, and pay hefty electricity bills. 

Mining pools and centralization

The need for expensive equipment and a lot of computing power leaves most people priced out or severely limits their ability to compete for mining rewards. It also encourages the creation of mining pools – groups of miners who join forces and combine their computational resources to increase their chances of faster and more reliable mining. Such consolidation of computing power puts blockchain’s decentralized nature at risk. 

Limited ability to scale 

Furthermore, there are serious scalability limitations with PoW and during high transaction peaks, users could end up waiting hours to get their transactions processed. Proof of Work is also limited in its capacity to support scaling solutions like sharding. 

How Proof of Stake works 

The world saw the first Proof of Stake coin in 2012 and since then PoS consensus algorithms have gained a huge amount of attention.  It’s no wonder that Etherium, the blockchain that powers the second largest crypto in the world, is now introducing Proof of Stake to its ecosystem via the Beacon Chain. PoS aims to solve PoW challenges like scalability limitations, high power consumption, and mining pools. 

The PoS validation process 

Rather than requiring computing work to mine blocks, PoS ramps up the financial incentives to ensure proper transaction validation. In order to become a validator in a protocol, a user must stake the protocol’s native token. The validators are then chosen algorithmically to create new blocks on the chain. At any given moment, those not chosen are tasked with validating the newly created blocks. Once a new block reaches a sufficient level of verification, it is added to the blockchain.

The incentive for proper validator behavior under the PoS consensus mechanism is the risk of losing the validator stake. In short, it all boils down to compelling rewards for good validator behavior and harsh penalties for malicious behavior. 

What are the advantages that PoS offers

The blockchain world is expecting to see a gradual shift towards the PoS consensus mechanism due to the vast array of advantages and solutions it offers. Designed to fill the gaps of the PoW mechanism, PoS offers the following.

An eco-friendly alternative 

PoS solves the key problem of substantial power consumption needed for crypto mining. With Proof of Work, miners need to burn computational power for calculations to ensure the security of the network. PoS simulates the process without wasting any real-world energy. Under this mechanism, miners don’t need to  depend on giant farms and single-purpose hardware to stay ahead of others. What do the numbers reveаl? By adopting PoS over PoW, Etherium’s energy usage is expected to decrease by 99.95%. 

Stronger security

The stake of misbehaving on a network abiding by PoS algorithms can be extremely costly. Validators not only risk missing out on the rewards for proper behavior, but they can also lose all of their deposited coins. This leads to the expectation that all participants in the network will act in its best interest, minimizing malicious behavior and mitigating threats. 

Better support for sharding and L2 scaling

Compared to Proof of Work, Proof of Stake is much better suited to supporting sharding, which is a common strategy when it comes to optimizing large databases. By splitting a blockchain into smaller chains called ‘shards’, a much higher transaction throughput can be achieved.   The main issue here is that when it comes to PoW systems, sharding is a risky proposition, because smaller chains are more vulnerable to 51% attacks.

The 51% attack is a hypothetical scenario mostly related to PoW, where a group of miners gain control of more than 50% of the network’s mining hash rate or computational power. In this case, the network will be monopolized and the group of miners will have power over new transactions or the ability to reverse transactions that were under their control. This could lead to double-spending and severe security breaches. 

The enhanced security of PoS makes the mechanisms much more resistant to such attacks and opens the door to sharding. In addition, PoS is also well suited to supporting Layer 2 scaling technology, such as rollups.

Resistance to centralization

Considering that there is no benefit from creating mining pools under the Proof of Stake mechanism, decentralization is no longer at risk. PoS makes it easier for individual validators to participate in the network, as you don’t need to rely on expensive hardware or pay for costly power consumption. Furthermore, with PoW, there are risks of a dominant tech player monopolizing the market. PoS eliminates this threat. 

The future ahead 

Proof of stake is already having a huge impact on the blockchain sector, with a number of prominent protocols having adopted PoS-based models. Proof of stake’s potential has also inspired a lot of R&D, with blockchain developers coming up with different PoS interpretations aimed to better utilize its strengths. For example, proof-of-delegated-stake algorithms, like the one used by Solana, offer a built-in mechanism that allow ordinary people to participate in the staking process without too much of a financial burden. Meanwhile, proof-of-staked-authority algorithms. offer a robust solution for enterprise networks

Proof of Stake is undoubtedly a turning point for the blockchain world and is a key element in modern blockchain architecture. It offers efficiency, cost reductions, scalability, and a ton of benefits. It can successfully be used for the creation of trustless systems that can be exploited by dominant cryptocurrencies like Etherium and other smaller players. We’re yet to see how The Merge between Etherium’s Beacon Chain and Mainnet will influence the crypto community.