Proof of stake (PoS) is a mechanism used to validate the legitimacy of transactions in blockchains. It is an alternative to the more wide-spread mechanism called proof of work.
In PoS, users get the opportunity to add new blocks to the chain, based on the amount of cryptocurrency they hold. Those with a larger stake of the blockchain’s native currency are more likely to be selected as validators and make money with transaction fees.
As with PoW, the point of this mechanism is to prevent spam and double spending attacks. At the same time, it also achieves distributed consensus.
PROOF OF STAKE ESSENTIALS
- Proof of stake is a method used to secure transactions on a blockchain.
- It is an alternative to the currently more common proof of work.
- It prevents double-spending attacks.
- It replaces mining with the need to own cryptocurrency tokens.
- The main purpose is reducing energy waste due to mining.
Eliminating wasteful energy consumption
In proof of work, the chance to create new blocks is given to the first user that solves a cryptographic problem. This is a rather inefficient process in terms of energy consumption. Large amounts of processing power are used when competing for the chance to create a new block of data, while actually creating that block itself requires a miniscule amount of processing power compared to solving a PoW puzzle. The effort required to create (or mine) a new block is what guarantees its legitimacy.
Proof of stake works around this approach by eliminating the need to prove that transactions are legitimate through work. Instead, validators stake a certain amount of cryptocurrency by locking it in the blockchain. This deposit acts as proof for the legitimacy of their intentions. It earns validators the right to add new blocks of data to the chain. Some processing power is still needed to form a block and fill it with transactions, but this low energy requisite can be handled by ordinary modern computers at minimal energy costs.
PoS eliminates the need for mining, and validators are sometimes called minters or forgers instead of miners. PoS works on the premise that minters will always act honestly and never harm or exploit the system, since they own a notable amount of the blockchain’s native cryptocurrency. Causing harm to the blockchain would make their tokens lose value, so there is no incentive to do so.
This also lowers the chances of a potential 51% attack. A 51% attacker would need to own the majority of the total available cryptocurrency to carry out a successful attack. If they attacked the system, they would cause more harm to themselves than anyone else.
Threats to decentralization
A common concern for PoS is that it favours validators with more crypto. Some critics see it as a case of the rich getting richer and the poor being left behind. This could threaten blockchain decentralization by amassing the majority of power in the hands of a few individuals.
While these concerns certainly have merit, it is important to note that the same can be said about PoW. In fact, this has already been well-confirmed. The majority of Bitcoin mining power comes from a handful of mining pools. If a player with enough capital entered the market, they could overwhelm the PoW system by buying an absurd amount of mining gear.
Amassing the power to seize a PoW system would be expensive, but probably cheaper than buying 51% of a reputable crypto, like ETH. The reason ether is used as an example here is that the Ethereum platform will be switching from a PoW to a PoS system after the event known as the Ethereum merge.
The selection process used to determine the minter of the next block is not based only on who holds more tokens. That would make it too likely that the majority holders would be selected over and over again. To solve this problem, blockchains use different functions, with most of them including a measure of randomness in the selection process.
The PoS system as described in this article is a simplification of how the process actually works. This was done to give you an understanding of the underlying concepts. In reality, each project attempting to use PoS slightly modifies the concept and introduces its own rules. Going through all these variations, however, is beyond the scope of a single article.
PoS has already been implemented by a number of cryptocurrencies, but the mechanism is still being developed. It still has some way to go before it reaches the level of trust and adoption enjoyed by PoW.