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What is Proof of Stake (PoS)? A Complete Guide for Beginners

Christian Klausen

ByChristian Klausen

Feb 25, 2023

Over the past couple of years, blockchain technology has grown at an exceptional rate gathering the attention of several investors worldwide and getting hold of numerous businesses. Blockchain technology provides a decentralized platform free from the interruption of a third party.

Blockchain has an image of being complex and difficult to understand. This is largely due to the consensus process, which is essentially how the blockchain community agrees on past, current, and future transactions.

Despite blockchain’s growth and development, there still needs to be more clarity around the concept of consensus protocol and how blockchain conducts transactions.

In this article, we’ll discuss a consensus mechanism in detail. This article will mainly focus on the PoS consensus protocol, which is the underlying algorithm of Ethereum 2.0.

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Blockchain Consensus Mechanism

Cryptocurrencies are blockchain-based, which means they are decentralized without any involvement of a central authority. There is no central authority to keep a check on the activities taking place in the system.

How does the blockchain network process a transaction if this is the case? For the functioning of blockchain technology, every node must have accessibility to the same, constantly updated database. This is where the consensus mechanism comes in.

Blockchain consensus is a strategy a computer network uses to decide on the status of a distributed ledger. Consensus protocol in a blockchain guarantee that all members have a reliable and precise perspective of the shared ledger.

The consensus process checks and approves transactions, puts them on the blockchain, and assures the network’s security and dependability. The intent is to guarantee that all network members accept the same blockchain version, regardless of whether certain nodes fail or seek to take advantage of the system.

In blockchain networks, numerous consensus procedures are utilized, such as Byzantine Fault Tolerance (BFT), Proof of Work (PoW), Proof of Stake (PoS) and Proof of Burn. Every mechanism has advantages and disadvantages and is intended to handle unique issues in the blockchain ecosystem. Among these, PoW and PoS are quite popular.

In Proof of work, miners compete using their processing capacity to tackle a hard computational problem called a “hash function” in PoW. A fixed reward is awarded to the first miner that solves the problem and adds the new verified block to the blockchain.

The more a miner’s processing power, the better their odds of solving the problem and adding the block to the blockchain. This implies that miners must invest considerable computing resources, like specialized equipment and power, to mine new blocks effectively.

Proof of work is meant to be computationally complex and demands a lot of energy usage, which might be detrimental to the environment. Yet, it is also regarded as a secure consensus process due to the difficulty of manipulating the blockchain.

On the contrary, Proof of Stake compels the validators to validate the block and hence doesn’t require a lot of computational power, saving electricity costs and generating new blocks. Let’s have a look at the Proof of Stake in more detail.

Understanding Proof of Stake (PoS)

Proof of Stake (PoS) is a blockchain consensus mechanism used to verify transactions and produce new blocks. It’s an even more advanced version of the Proof of Work (PoW) process in cryptocurrencies like Bitcoin.

In a PoS system, validators (or “stakers”) are chosen to validate transactions according to the quantity of cryptocurrency they own and are prepared to lock it up as security. This process is called staking.

Moreover, Proof of Stake determines who will manage the profitable task of validating a transaction on the blockchain. If they verify the transaction without tricking the system, the chosen people will be awarded more crypto.

We say that users have established a consensus when network validators confirm the legality of the new transaction and add it as a new block to the blockchain. It is important to note that if any validator on the blockchain improperly validates sluggish or fraudulent data, they may be fined and lose some or all of their investment.

Mechanism of Proof of Stake

In contrast to Proof of Work (PoW), which requires miners to do complicated mathematical computations to confirm transactions, Proof of Stake (PoS) involves validators staking their cryptocurrency as collateral to participate in the verification process.

Here is how PoS works:

Validators “stake” a set quantity of cryptocurrency as collateral. This Stake is utilized for transaction validation and network security.

Validators are Selected to Validate Blocks

Rather than miners, as in the case of PoW, in PoS, validators are picked depending on the magnitude of their Stake to generate blocks. Validators with higher stakes are more likely to be picked to produce a block. Validators can be chosen in a variety of methods, including:

Randomized Block Selection

In this, validators with low hash value and the highest coins stake are preferred. Additionally, any network member may see the Stake proposed by other validators.

The Coin Age Selection technique considers the time at which a validator staked his investment and the overall quantity of coins staked coin. When a validator is chosen, its coin age is zeroed out. A validator has to wait for a certain amount of time before getting into the field again and generating a new block.

Validators Verify Transactions

Chosen validators then validate the transaction by voting on the legitimacy of the transactions utilizing their Stake.

Validators who properly validate transactions are rewarded with transaction fees and cryptocurrencies.

If a validator verifies inaccurate transactions or attempts to assault the system, they may forfeit their Stake as a consequence. This actively encourages validators to operate for the mutual benefit of the system.

One of the primary goals of Proof of Stake is to conserve the energy required to maintain a network. Proof of Stake doesn’t require miners to solve complex mathematical problems; rather, it depends on validators, also called stakers stake their cryptocurrency and then validate a transaction if chosen by the network.

Secondly, Proof of Stake is designed to reduce network traffic and environmental challenges connected with the (PoW) Proof-of-Work approach. Last but not least, PoS intends to offer a substantial amount of protection against potential attacks, such as 51% attacks, in which a group of miners controls more than half of the computational power on the network.

Under PoS, attackers must control at least 51% of the coin supply to conduct such an assault, which would need massive resources.

Advantages of Proof of Stake

Following are some of the perks of Proof of Stake

Decentralization

PoS networks are decentralized since anybody who meets the minimal stake threshold can become a validator. As a result, more individuals can engage in network governance and decision-making, lowering the danger of centralization.

Energy Efficiency

The Proof of Stake (PoS) consensus method consumes far less energy than the Proof of Work (PoW) consensus process since PoS depends on staking tokens to verify transactions and build new blocks, which uses a lot fewer resources.

Scalability

Proof-of-stake resolves scalability difficulties that have plagued the proof-of-work protocol. PoS allows for speedier transactions because blocks are accepted faster, as no difficult mathematical problems must be solved. There is more scalability as no physical devices or mining farms needing large amounts of energy are required to create consensus.

Security

Proof-of-stake will provide a monetary incentive to avoid validating fraudulent activity. A dishonest validator fears losing more money than what they’ll receive via fraud because the stakes are always more than the offered financial incentives. If they act maliciously, their Stake is at risk of being slashed, which could lead to significant financial losses.

Proof-of-stake renders it difficult for any individual to regulate the whole network since they must hold and stake 51% of the total flowing quantity of crypto assets.

Faster Transactions

PoS provides quicker transaction validation times. Since there is no need to answer hard, complex computational problems with PoS, validators can validate transactions considerably more quickly. PoS can perform 100,000 transactions in one second compared to PoW, which can only do 30 transactions in one second.

Reduced Transaction Fees

As PoS networks do not need as much processing power as PoW, they often have reduced transaction prices. This makes network transactions more economical for consumers.

Minimal Manipulation

PoS reduces the need for complicated computations, resulting in greater efficiency. The ability to verify transactions is given to those who have staked most of your crypto assets. People having large stakes are less inclined to abuse it. Even if they do so, their Stake might be lost.

Since PoS requires you to stake your assets, but it doesn’t require you to do it on your own. Exchanges run stake pools, which means you may contribute some of your assets to the pool and earn incentives in return.

Adaptability

Another advantage of PoS consensus is adaptability. The demands of users and blockchains are evolving, and so is PoS. The technique is extremely adaptable, and it can readily accommodate other blockchain uses.

Disadvantages of Proof of Stake

There are some potential advantages of using Proof of Stake. Let’s see them in detail.

Centralization

While PoS encourages network users to keep their money and become validators, it may also result in centralization if very few validators control a large share of the crypto supply. This can result in the establishment of “oligarchies,” in which a few validators wield excessive authority over the system.

Entry Barrier

The distribution of cryptocurrencies in a PoS network might be difficult at first. Unlike PoW, where anybody with the correct gear may engage in mining, PoS demands users retain a particular quantity of cryptocurrency to serve as a validator. This can act as an obstacle to the entrance of new users and make achieving a globally spread network more challenging.

Network Participation

In Proof of Stake, validators are in charge of validating transactions and keeping the network running. If a substantial percentage of validators leave the network, it may cause a delay in processing transactions and degrade the entire system’s security.

Slashing Risk

Validators in a PoS system may lose their staked cryptocurrency if they act deliberately or make errors. This is referred to as the “slashing danger,” and it may discourage some users from becoming validators.

Lockup Periods

Some PoS platforms require validators to lock up their staked asset holdings for a predetermined length of time. This means your staked assets are now locked, and you must have to wait for a specified amount of time to retrieve them. Polkadot, for example, mandates you to keep your assets locked up for 28 days.

Favouritism

PoS accentuates the magnitude of a validator’s investment. Higher stakes mean greater chances of being chosen as a validator. This is wrong for less wealthy nodes producing a bias problem.

Proof of Stake vs. Proof of Work

Proof of Stake (PoS) and Proof of Work (PoW) are two different mechanisms used by blockchain networks to validate transactions and achieve consensus. But they differ significantly. Miners struggle in PoW to tackle complicated mathematical riddles in to verify a block of transactions.

The one who wins the race is awarded cryptocurrency and gets to upload the block to the blockchain. Validators in PoS are selected based on their staked asset. To validate the transactions and add a block to the blockchain, validators are picked at random.

When it comes to security, PoW is seen as a highly secure approach since it necessitates a substantial amount of computer power to overpower the network. To launch an assault, a malicious entity would have to possess the bulk of the network’s processing power.

In the case of PoS, a malicious person needs to own the majority of the cryptocurrency stake. It is worth mentioning, however, that PoS networks have extra security features in place, such as sanctions for harmful activity, which can discourage malicious actors.

Furthermore, PoW is criticized for its high energy needs since miners must utilize a substantial amount of computational resources to solve complicated challenges. This leads to excessive power usage and a negative impact on the environment. PoS, on the contrary, consumes substantially less energy because validators are selected depending on their Stake instead of their position.

Ethereum 2.0

Ethereum 2.0 is the most eagerly anticipated blockchain upgrade. Ethereum finally recognizes its scalability and performance issues. This brings us to the question of why the Ethereum network upgraded to PoS consensus from PoW. The main reason was that Ethereum PoW takes too much time to consume transaction due to network congestion which in turn lead to the high transaction cost.

This posed a big drawback to the Ethereum network. To increase the transaction rate per second, Ethereum switched its consensus mechanism from PoW to PoS. Because PoS blockchains take a significantly shorter duration to reach an agreement, it increases the network’s total throughput.

Another reason for the switch was to make the network more power efficient since PoW demands more electrical consumption. With PoS, Validators are required to verify a transaction; hence the cost of all electrical power is greatly reduced. To sum up, moving to the PoS paradigm will enable Ethereum 2.0 to grow to be more accessible, efficient, and suited for heavy transaction industrial uses.

Future of Proof of Stake

Blockchain system was heralded as the future technology, with decentralization at its foundation. Unfortunately, its dependency on computation power resulted in the concentration of mining pools, compromising blockchain technology’s basic goal.

Some of the fundamental difficulties that blockchain technology is now experiencing are not solved by PoW consensus.

As the worldwide appetite for green technology grows, the PoS consensus algorithm is becoming the industry standard in the blockchain sector. Furthermore, the dispute over the practicality of PoS vs PoW will always be there; however, since more blockchains use PoS, more opportunities are going to arise.

The PoS algorithm is right now in its developmental stages, but it is clearly one of the best competitors for consensus algorithms as we move forward, and we investors are expecting to see it rise in the future. So we can say, The future of Proof of Stake (PoS) is looking bright as more blockchain networks are adopting this consensus mechanism.

Conclusion

To summarize, Proof of Stake (PoS) is a consensus process that certain blockchain platforms utilize to verify transactions and reach consensus. PoS provides multiple benefits, such as increased energy efficiency, scalability, and security. It also provides for more decentralization and is less prone to power centralization. Yet, there are also drawbacks to PoS, such as the possibility of stakeholder centralization and the necessity to create suitable punishments for bad activity.

Overall, PoS is gaining traction, and numerous blockchain platforms, like Ethereum 2.0, are using it. It is important to keep in mind that all blockchain networks have distinct demands and objectives, and the adoption of the consensus method relies primarily on the network’s individual needs.

Christian Klausen

Christian Klausen

Christian Klausen is a talented news writer renowned for his compelling storytelling and comprehensive research. With a sharp eye for detail, his articles offer readers a thought-provoking and well-informed perspective on a wide range of current topics.

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