What is Proof-of-Stake?

As protocols like Polkadot, Solana, Cardano and Ethereum 2.0 are becoming known names in the crypto community, some might be wondering whether Proof-of-Stake (PoS) is going to bring cryptocurrencies to greater heights in terms of price and…

As protocols like Polkadot, Solana, Cardano and Ethereum 2.0 are becoming known names in the crypto community, some might be wondering whether Proof-of-Stake (PoS) is going to bring cryptocurrencies to greater heights in terms of price and functionality. Proof-of-Stake protocols have been in development for years now, and they have amassed a legion of future developers, investors and fans who all want to see them succeed.

Whether Proof-of-Stake will become the dominant consensus mechanism of the future or not, it has its own benefits and drawbacks. Let’s see what they are.

Brief History of Proof-of-Stake

Proof-of-Stake’s roots are humble. This PoS idea on July 2011 brought out in a bitcointalk thread by QuantumMechanic is now saved as an artifact of cryptocurrency history. The poster details PoS mechanics but attempts to make this a solution to Bitcoin’s problems. The answer to this question by casascius is ominous. The first reply sees the future of this applied to other kinds of applications and not to Bitcoin, which seems to remain the case.

In 2012, Peercoin was developed which used a combination of Proof-of-Work and Proof-of-Stake protocols. In 2014, the whitepaper Consensus without Mining was released as well as a solution by Vitalik Buterin to the ‘Nothing at Stake’ problem of Proof-of-Stake. Cardano and Polkadot as well as other projects that utilize Proof-of-Stake were starting out as projects. In 2019, the Cosmos mainnet was launched and Ethereum 2.0’s details were ironed out.

Fast forward to 2021 and the cryptocurrency world experienced unprecedented interest with Cardano and Polkadot leading the charge as the biggest already active Proof-of-Stake blockchains. With projects like Solana, Neo, Algorand, Binance coin and others all adopting Proof-of-Stake, time will tell if Proof-of-Stake will become the dominant consensus mechanism amongst cryptocurrency projects.

What is Proof-of-Stake?

Bitcoin and some other crypto networks operate on what is called Proof-of-Work (PoW) consensus mechanism. In cryptocurrency, consensus mechanisms are what allows an entire system to function with individual computers, or nodes. They use consensus algorithms in order to work out the current agreed state of the network. It’s vital that every single node has to have the exact same copy of the blockchain and validate the same rules to be ‘in consensus.’

One of the main factors of decentralization is to not be subject to any central authority, as the laws that govern any blockchain project adhere to math and code. An alternative to that is a centralized authority that dictates how a project runs, can make changes to the consensus, and censor or discriminate system participants.

Blockchain technology works as a digital ledger that everyone can see. What’s to stop other users from tampering this digital ledger? In legacy networks, this is what Proof-of-Work does. Using hashes, long data strings of a set length, Proof-of-Work makes sure that the blockchain is unalterable. Each block, or data set, has been validated through vast computational work.

In contrast, Proof-of-Stake (PoS) is a variety of a consensus mechanism that uses validator nodes based on staked tokens. Instead of computational power that creates blocks in Proof-of-Work, Proof-of-Stake creates blocks by relying on validators, who are users who stake tokens. Each validator is given a random chance to reap a block reward.

However, although having undergone good development, the PoS concept is still new and only time will tell whether Proof-of-Stake will be the prevailing consensus mechanism of the new age.

How Proof-of-Stake Works

Mining in Proof-of-Work cryptocurrency protocols use computational power to validate blocks. This is to verify the network and make sure that the transactions are legitimate. It eliminates the problem of ‘double-spending’ in which the same token can be used in another transaction. Since it requires vast computational work in order to validate a single block, this ultimately secures the network. If something takes intense computational power to obtain the algorithm, then trying to reverse that code is an enormous task.

Proof-of-Stake attempts to replicate these Proof-of-Work ideas in mind but executes them differently. In Proof-of-Stake protocols, it uses an algorithm that gives a selection for a node to be a validator for a block. These are processed in either ‘Coin Age Selection’ or ‘Randomized Block Selection’.

1. Coin Age Selection

This one is a bit easier to grasp than Randomized Block Selection. Coin Age Selection was used by the aforementioned Peercoin, one of the first cryptocurrencies to use Proof-of-Stake. It is a mechanism that validates blocks based on the duration of tokens. With Peercoin, a minimum of 30 days for unspent tokens must be held in order for a block to be forged and it is used to sign a block. A maximum amount of block minting probability is reached after 90 days to prevent older stakes from having too much power.

Although this is used in the early ideas of Proof-of-Stake, newer protocols are now using Randomized Block Selection for their consensus mechanism.

2. Randomized Block Selection

To get a better picture of what validators are in Randomized Block Selection, in Ethereum 2.0, a validator node is someone who has staked 32 ETH and has a computer running in order to ‘mint’ or ‘forge’ blocks. ‘Minting’ is what ‘mining’ is in Proof-of-Work.

When a miner in Proof-of-Work systems validates a block, that miner or mining pool is given a reward in the form of cryptocurrency tokens like BTC, LTC, ETH, and so on. In Proof-of-Stake, a validator validates a block through a ‘random’ selection. In the case of Ethereum 2.0, the validator that is running that 32 staked ETH has a random chance to validate a block. This chance is similar to other validator nodes in the network. Having more ETH doesn’t affect this chance, unlike having more hash power in Proof-of-Work system like Bitcoin gives a better chance to obtain the block reward. So an organization can have multiple nodes to increase the likelihood of minting a block but each node has the same random chance as any other node.

Although each protocol might differ in execution, these are the fundamental components of Randomized Block Selection Proof-of-Stake protocols.

Proof-of-Stake’s Potential Improvements to Proof-of-Work

PoS consensus mechanisms are notable in that they attempt to solve the scalability and usability issues of Proof-of-Work consensus mechanisms. For one, Proof-of-Stake will save an immense amount of electrical energy that would have been used to mine blocks. Although the electrical drainage is often overblown by media in Proof-of-Work, it still costs tremendous energy in order to mint a new block into existence and thus secure the network. Proof-of-Stake only requires validators to have their own computers up and running or for users to have tokens to stake in a pool.

Proof-of-Stake promises to be more scalable since it has a ‘lighter’ architecture by not needing as much of the computational power that Proof-of-Work needs. This means that more of the power can be allocated to things like the transaction speed for there to be more action in the network without it being clogged. This would make blockchain projects more scalable since the network would be faster to support more projects on the ecosystem.

On the other hand, PoS systems arise major concerns about supply centralization, conflict resolution in case of a fork, and other security trade-offs. Regardless of the hype, we are yet to witness a fully-functioning Proof-of-Stake system implemented on a large scale and high capital protocol.

Conclusion

Although promising to take blockchain technology to another level, Proof-of-Stake is in its infancy. There have not been many examples of widespread decentralized applications or cryptocurrencies that are totally dedicated to the use of Proof-of-Stake. Once years of testing and practical implementation have come to pass, we may look at Proof-of-Stake and suggest possible improvements to each projects’ architecture. As of right now, PoS carries the hopes of an army of cryptocurrency enthusiasts who see it as a beacon of hope for the future of blockchain technology.