The Proof-of-stake Is in the Pudding

Lesson 7: Getting to Know the Basics of Blockchain Consensus

Photo by American Heritage Chocolate on Unsplash

Because blockchains are decentralized and lack a single gatekeeper or authority who can oversee its operations, security is a significant concern. In a decentralized system one or more parties might gain control of the network.

There have been two major types of processes that help to validate transactions on the blockchain and ensure that no person or group can gain majority control — or what is known as a 51% attack. These are Proof-of-work (POW) and Proof-of-stake (POS).

To understand why POS is becoming an important feature of blockchain security, it’s easiest to begin with POW and why it faces scrutiny with respect to environmental concerns.

POW

In POW, valdiation of transactions occur through miners. (Note the connection between proof-of-work and the labor of mining.) In theory, the structure and process of POW is quite simple. In order for miners to validate transactions, they need to solve computational problems, or hash puzzles. When solving a hash puzzle, miners verify the transaction and are financially rewarded.

Transaction verification involves capturing that transaction as a component, or “block”, of the blockchain. In other words, verification results in adding a new block to the blockchain. Financial rewards entail receiving Bitcoin for mining success.

POW involves an enormous amount of computational power, and therefore expends an enormous amount of electricity. In 2021, it was estimated by the Cambridge Bitcoin Electricity Consumption Index that Bitcoin POW mining used as much as 480 terrawatt-hours. The State of California uses 259.5 terrawatt-hours annually (or 7% of the U.S. total).

Because only one miner can validate a transaction, the mining process is a competition to solve a hash puzzle. Because the competition involves a group of miners, the effort to solve the hash puzzles is referred to as a consensus process of verification.

These two features of competition and consensus comprise the key security feature of POW. Because it is unlikely that any one miner or small group of miners can consistently validate related blocks, no one miner or small group of miners can control the validation process or change the history of transactions.

Controlling a majority mining position is referred to as a “51% attack”. Because of the enormous resource cost in POW mining, 51% attacks are extremely expensive, and therefore cost-prohibitive. Furthermore, there are timing complications. As Jake Frankenfield puts it,

In addition to the costs, a group that attempts to attack the network using a 51% attack must not only control 51% of the network but must also introduce the altered blockchain at a very precise time. Even if they own 51% of the network hashing rate, they still might not be able to keep up with the block creation rate or get their chain inserted before valid new blocks are created by the ‘honest’ blockchain network.

An academic article notes that at the time of writing (Jan 2020), there have been several 51% attacks on POW blockchains–e.g. Verge, GameCredits, Bitcoin Gold.

As mentioned above, POW requires an enormous amount of energy. For this reason it has been criticized for being environmentally harmful and is the subject of governmental bans. Nonetheless, there are ways in which POW might be made more environmentally friendly.

1. Use of sustainable energy to fuel mining;
2. Use of energy in mining to resolve real use cases as opposed to solving essentially useless hash puzzles.

But instead of revising how POW can be more acceptable, many blockchains have switched to or are switching to POS.

POS

To recall: POW miners are required to use a great deal of energy and compute resource to solve hash puzzles. In doing so, they are expending a great deal of capital. This cost is necessary to ensure the honest validation of transactions. Or, what amounts to the same thing: the cost disincentives the moral hazard of dishonest behavior. No miner wants to expend their capital unless they can be rewarded.

How does POS differ?

• POS achieves validation and consensus via a process of staking capital.
• Instead of expending capital, validators stake their capital.
• Instead of capital consisting in energy and compute resource, staking consists in providing cryptocurrency. For example, staking on the Cardano blockchain involves staking, or locking, the Cardano cryptocurrency coin (ADA).
• Instead of miners, POS involves validators.
• Instead of being awarded for solving a hash puzzle, POS validators earn passive income when staking their coins.
• Instead of the risk of losing the amount of energy and compute resource expended in solving hash puzzles, POS validators risk losing their staked coins if the validator attempts to validate dishonest transactions.
• Instead of requiring an enormous amount of mining (hence energy and compute power) to change transactions that have become part of (or a block of) the blockchain, POS validation requires an enormous amount of the native cryptocurrency to be burned (or spent).
• In POW, the threat of a 51% attack (or a collective effort to control validation for dishonest motives) is minimized due to the immense amount of computational power required. In POS, this minimization involves the immense amount of cryptocurrency required to be spent.

Major blockchains that use POS include Cardano, Tezos, Tron, EOS, and Cosmos. Ethereum is due to switch over to POS in the third week of September 2022, or what has been dubbed “The Merge”.

According to Ethereum, the benefits of POS include:

• better energy efficiency;
• lower barriers for being involved in the validation process (there is no need to expensive computer equipment to mine);
• reduced risk of centralization since POS tends towards involving more validators (or nodes).

Though Ethereum claims that the POS mechanism makes “51% style attacks exponentially more costly for an attacker compared to proof-of-work” (ibid.), it is theoretically conceivable for a validator holding a huge store of cryptocurrency (or “crypto whale”) to provide 51% of the necessary coin to act dishonestly.

How To Apply This

Since security is not a criterion that separates the two forms of consensus, it really comes down to what you think is better for the environment and for the development of blockchains.

There seems little on the side of keeping POW as the majority form of consensus given how much power it uses and how useless its tasks are when using this power. However, if such power might be made more green/sustainable and also used to serve some direct purpose benefitting a society, then there does seem to be some merit.

An example of this is using compute power to provide assistance insolving problems users on the network might be having in real life. Applications of artificial intelligence might be delegated via a decentralized network to those clients who need a particular function that AI can provide.

I am a reseacher and writer for 1.2 Labs and The Art of the Bubble.

This article is a part of the Crypto Industry Essentials educational program presented by The Art of the Bubble.

Though this article is credited to me, it contains some written material by Sebastian Purcell, PhD from his The Art of the Bubble education series on cryptocurrencies.

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