Understanding Proof-of-Stake: Suggested Benefits, Part 1

Julian Roberto

Published in

Coinmonks

7 min readMay 24, 2018

In proof-of-work (PoW), consensus mechanisms and miner incentives all fall under a simple logic:

How do we solve temporary forks in the network? We choose the fork with the most PoW.

How do we decide which miner gets to propose the next block (aka how do we create randomness)? We turn to proof-of-work.

How do we prevent miners from attacking the network? Once again, PoW provides us with the answer.

Proof-of-work’s elegance is in its simplicity.

In their quest to enhance the potential of blockchain technology, the Ethereum foundation is planning on transitioning to a new consensus mechanism called proof-of-stake (PoS). Ethereum’s PoS complicates many things that PoW makes simple. Instead of relying on PoW for all of the answers, PoS encodes extra rules into its software.

Opponents of PoS suspect that encoding these new rules will leave Ethereum vulnerable to a number of new attacks that are impossible to execute in PoW. They suspect that Ethereum will not be able to survive these attacks.

While the PoS consensus mechanism they are developing is more complex, Ethereum is betting that PoS will be able to improve the security and efficiency of blockchain technology while creating the conditions necessary to scale blockchains for mass adoption.

What is Casper?

You will often hear the proof-of-stake algorithm that the Ethereum foundation is developing referred to as Casper. This can be confusing because Casper refers to many different branches of proof-of-stake research. Different branches of Casper research include Casper the Friendly Finality Gadget, Casper Correct by Construction and Casper the Friendly Ghost. The reason that there are so many different versions of Casper is because each version explores a different way of implementing proof-of-stake.

Although they all explore different implementations of proof-of-stake, these branches of research are all meant to influence/inform what the final form of PoS will eventually look like.

For the purpose of this article, when I refer to Casper or proof-of-stake, I am referring to what is currently planned to be Casper’s final form. This form is continuously evolving but in this post, I have scoured the internet in attempt to get you the most up-to-date information on what Casper is set to look like in the future.

Suggested Benefits of PoS

In the following text, I will list the suggested benefits of PoS. It is important to keep in mind that these benefits are unproven until PoS goes live.

Less Electricity Consumption

Proof-of-stake is expected to dramatically reduce energy consumption in comparison to PoW and therefore be more environmentally friendly. Conservative estimates suggest that Bitcoin miners collectively consume electricity at the same rate as a small country.

Proof-of-work’s high level of energy consumption is very intentional. PoW intentionally creates sunken costs for miners that they can only recovered if they follow the rules of the network.

If they follow the rules and build on the most PoW, they will receive their block reward, pay off their electricity bill and make some profit in the process.

Conversely, if a miner tries to somehow cheat the network, they will not receive their block reward and they will not have the money necessary to pay off their electricity bills.

Replacing Electricity with Eth Deposits as the Incentive

Instead of using the sunken cost of electricity as the incentive to encourage miners to play by the rules, Casper is using validator security deposits. Validators in PoS play the same role that miners play in PoW. Validators are not allowed to propose and validate blocks until they first submit a deposit of Ether into a smart contract. If validators attempt to cheat the network, they lose a portion and potentially all of their security deposit.

Ethereum’s PoS is attempting to replace electricity costs with security deposits as a deterrent. This means that PoS doesn’t require huge amounts of processing power to incentivize validators to follow the rules of the network. By removing the need for heavy processing power to secure the blockchain, PoS aims to maintain network security while dramatically reducing energy consumption.

Vitalik Recently Tweeted this image with the text “Sharding is coming.” Source

Setting the Foundation for a Faster Blockchain

Casper will not directly increase Ethereum’s transaction speed (measured in transactions per second) but it is seen as a necessary step (precursor) that will enable a future upgrade called sharding.

Sharding is a planned Ethereum upgrade that is expected to lead to a massive increase in transactions per second. Transactions per second are expected to increase because sharding divides the work of validators in the blockchain network. Currently in PoW, thousands of nodes and miners are repeating the exact same computations throughout the entire network. This is done to ensure that miners are not attacking the network.

The Ethereum foundation is betting that we can get similar security guarantees by splitting up the workload of the network and have different “shards” or subsets of the network verify each others work. The expected added benefit is that we can increase transactions-per-second (tps) by orders of magnitude.

Sharding is theoretically possible in PoW but is a little more difficult because PoW does not have an in-protocol sense or definition of finality. When we say that a block has achieved finality, it means that the transactions in that block can never be reversed. When a block achieves finality, we can be confident that this transaction will forever be in the history of the blockchain.

Probabilistic Finality

Finality in PoW is often referred to as probabilistic finality. Without getting too technical, the overarching idea is that as your transaction gets buried under more and more blocks, the likelihood of your transaction getting reversed continues to approach (but never reach) zero.

The reason PoW blockchains always have a chance of getting reverted is because the correct blockchain is always the one that demonstrates the most PoW.

If there is ever a time when an attacker launches a 51% attack and reverts 10 blocks (or 2 blocks or 20 etc.), although unlikely, the network would instantly accept the revision as long as it demonstrated the most PoW.

You may have heard that businesses usually wait for 6 confirmations before they consider your Bitcoin transaction valid. It is important to keep in mind that waiting for 6 confirmations is not a rule that is enforced by Bitcoin client software. It is a general practice solidified by the crypto community because they believe that after 6 blocks, the probability of a transaction reverting is low enough to consider that transaction final. After 6 blocks, the community has agreed that the transaction is probabilistically final.

From my understanding, the reason that PoW’s probabilistic finality makes sharding difficult is because shards need to agree on a certain view of history at any given time in order to efficiently and effectively coordinate with each other. If a blockchain is always at risk of reorganizing its history because some miner randomly demonstrated PoW that reverts several blocks, it can make achieving this coordination very complicated.

Casper’s Definition of Finality

In contrast to probabilistic finality, Casper provides us with “economic finality.” With economic finality, when the Ethereum protocol tells us that a transaction is finalized, we can be sure that either 1 of 2 things has happened:

1) the transaction you are viewing has actually finalized or

2) a malicious validator (aka PoS miner) or group of validators tricked you into accepting a fake blockchain, but they lost multi-millions of dollars worth of Ether in the process.

The key detail here is that Casper aims to give us an in-protocol definition of finality while PoW doesn’t. In other words, Ethereum client software will be self-aware that a transaction is final without human intervention while Bitcoin’s proof-of-work is unable to do so.

By equipping nodes across the network with the ability to simultaneously become aware of when certain transactions are final, the theory is that Casper’s economic finality will enable easier sharding compared to PoW’s probabilistic finality.

In next weeks post, I will finalize the “suggested benefits” portion of my series on PoS. I will discuss how Casper aims to reduce miner centralization and make it more expensive to attack blockchain networks compared to PoW.