What is Proof of Stake (PoS)?

Proof of stake (PoS) is a consensus method that blockchain networks employ to reach distributed consensus and confirm transactions.

The fundamental tenets of blockchain technology are decentralization and distributed databases. However, one of the most important aspects of blockchain is the requirement for network nodes to reach consensus on the current state of the network.

As a result, the consensus mechanism is an important architectural idea in the blockchain ecosystem. Currently, the two most prevalent consensus techniques are Proof-of-Work (PoW) and Proof-of-Stake (PoS). While PoW has been the traditional method for obtaining consensus in blockchain networks, it has a number of drawbacks.

PoS tries to address the flaws that were visible in PoW.

How does PoS work?

Blockchain is a distributed ledger of transactions that is decentralized.

Because there is no one server overseeing the network, everyone must agree on which transactions are genuine. It would otherwise be feasible for anyone to make bogus transactions. The servers in a blockchain are referred to as “nodes.” Transactions are processed by nodes. Some nodes can add blocks of transactions to the chain, therefore maintaining and extending the ledger. These nodes are known as “miners” in PoW networks such as Bitcoin.

In PoS, nodes commit funds to the network — a process known as “staking” — in exchange for a chance to be chosen as the next block writer, as opposed to nodes vying to be paid for solving cryptographic problems, as in PoW. Nodes that may add blocks in PoS networks are known as “validators,” who are those who oversee validating transactions on a blockchain. Each validator has a chance of being chosen to write the next block and receiving the associated rewards. It’s like a lottery: the more the stake of tokens invested, the better the chances that node will be picked. The selection of the next block writer, the next validator, is a pseudo-random procedure dictated by the magnitude of the stake you have allocated to the network as a user.

Mining power in PoS

Mining power in PoS is determined by the number of coins staked by a validator.

Participants who stake more coins have a better chance of being picked to add additional blocks. Each PoS protocol picks validators in a different way. There is generally some randomness involved, and the selection process can also be influenced by other criteria like as the length of time validators have been staking their coins. Although anybody staking might be picked as a validator, the chances are slim if you’re staking a tiny amount.

If your coins account for 0.001% of the total amount staked, your chances of getting picked as a validator are around 0.001%. That is why the majority of players join staking pools. The validator node is put up by the owner of the staking pool, and a group of users pool their funds for a higher chance of winning fresh blocks. The pool’s participants share the rewards. A minor fee may also be charged by the pool owner.

PoS Vs. PoW

Both PoS and PoW techniques accomplish the same purpose, but in different ways.

The primary distinction between PoS and PoW networks is how the network obtains consensus for its blockchain. PoW achieves consensus by enabling a single member to write the next block in the blockchain and be compensated in the native coin of that blockchain for their work. Miners are basically consuming massive quantities of processing power and electricity while attempting to “solve an extremely difficult cryptographic puzzle”.

This technique has been criticized for needing excessive energy, having trouble expanding or developing the network, and failing to provide adequate throughput (the ability to process many transactions).

PoS can improve upon some of the biggest problems presented by PoW, namely:

• Energy consumption: PoS requires less energy than PoW.
• Transaction throughput: PoS networks can handle more transactions than PoW.
• Scalability: PoS networks can scale more easily than PoW networks.

Security

A 51% attack is an effort by an individual or group to acquire control of a network by controlling the majority of hashing or staking power. It is unknown if PoS networks are more or less vulnerable to 51% attacks than PoW networks.

The issue is primarily theoretical, as 51% attacks have only happened a few times in actual life. Due to the vast amount of processing power required, conducting this sort of attack against a network as large as Bitcoin would be almost unfeasible.

In the case of PoS, attackers would have to purchase more than half of the tokens being staked. The attacker might then become the only validator and take control of the network. According to one argument, this may be impossible to do due to how high it would push the price of any single token. The objective is that individuals will prefer to engage honestly in the system by staking tokens rather than go to the hassle of attempting to attack the network, which could quickly become expensive.

Bottom Line

The promising advancements in PoS consensus algorithms have demonstrated their viability for use in current blockchain networks. PoS is an enticing idea, with significant value gains in terms of energy efficiency, blockchain protocol throughput, and transaction speed. As the discussion over cryptocurrency’s environmental effect heats up, PoS coins may be a viable option. It is crucial to remember, however, that PoS is still in its early phases of development. In the long term, a thorough knowledge of the fundamental logic for PoS as well as the inherent hazards is unavoidable.