What is Proof of Stake? Explore Blockchain’s Popular Consensus Mechanism

What is Proof of Stake? Explore Blockchain’s Popular Consensus Mechanism

One of the main criticisms of blockchain technology is that it can prove to be a big strain on the environment. This is due to the amount of energy that the currently popular consensus mechanism uses for maintaining a decentralised network. 

Known as Proof of Work (PoW), it is an algorithm that essentially requires every system on a blockchain network to run complex programs to solve a puzzle. However, only one system is awarded the new block and its rewards upon solving the puzzle. This renders the energy consumed by all other systems wasted!

Energy Efficient Validation:

Proof of Stake (PoS) emerged in 2012 as an alternative to Proof of Work and is gaining more popularity due to its significantly lower energy consumption. Indeed, it has even become the mechanism of choice for the popular blockchain network Ethereum, which will switch to it from its current PoW standards in 2022.

Blockchain Proof of Stake currently has several advantages over existing PoW mechanisms. However, it is essential to remember that they are, by nature, consensus mechanisms. That means they work towards the same goal: securing a decentralised network. Proof of Stake, however, allows for a smoother and faster validation process.

How Does Proof of Stake Work?

PoW requires users on a blockchain network to spend computational power to calculate a specific hash, awarding a single user with a new block on the network. Alternatively, proof of stake creates the potential for every user on the network to participate in its expansion!

Essentially, proof of stake allows users on a blockchain network to “stake” a portion or all of their crypto holdings to gain the right to validate the next block on the network

Look at it as a refundable deposit that you put down to earn the chance of a reward! The reward corresponds to the user who staked the highest percentage of cryptocurrency to validate the block. 

It is important to remember that your stake is not usable until the new block is verified, but you earn a certain amount of cryptocurrency as a reward. 

Another important factor is how PoS deters potential malpractices on a blockchain network. 

If users have staked their holdings and attempt to validate an invalid transaction, they lose the cryptocurrency they had staked for it. This acts as a deterrent to any potential tampering with the network. It also incentivizes users to be transparent and honest in their transactions. 

Mining power depends on the percentage staked for the reward, but there is also an element of randomization involved! 

It can also depend on how long a user has held their stake on the network. Essentially, any user can be selected to validate the next block and earn the reward, although their chances increase with a bigger stake.

There are even staking pools where a single user stakes holdings of their own along with those of other users.

It increases their chances of earning the rewards associated with a new block. These rewards are then shared out among all of the users in the pool, based on the amount that they had contributed towards the original stake. 

Why Choose Proof of Stake?

There are several reasons to choose a blockchain network based on proof of stake as opposed to proof of work. 

  • The obvious advantage would be that of energy consumption. 

Networks running on proof of stake consume far less power and resources considering that a single node on the network runs validation programs and other systems do not need to contribute power. 

By switching the focus of the network from computational power to staking cryptocurrencies, proof of stake networks run more efficiently and faster. The mechanism significantly speeds up the validation process and allows for more speed from the blockchain network.

  • The additional increase to efficiency and speed addresses another limitation of blockchain networks based on proof of work: scalability. 

As PoW networks increase in size, they require increasing amounts of power and resources, making scalability a challenge. 

Blockchain networks based on proof of stake, however, can scale based on the user’s needs in a more cost effective manner. They can also ensure optimum efficiency and speed, enabling proof of stake networks to be used in various applications. 

How Can Proof of Stake Be Used?

  1. PoS’ utility is not limited to cryptocurrencies, although they form a significant part of its current presence in blockchain networks. 
  2. Proof of stake also offers another advantage over its counterpart – compatibility with Smart Contracts and Layer-2 additions to validating programs.
  3. Essentially, PoS networks can help users create sub-programs and validation functions that execute specific instructions when a condition is met. This increases the utility of proof of stake blockchains, allowing them to extend their functionality in various ways.
  4. Consider NFTs, for instance. They utilise the proof of stake concept to allow artists to earn royalties every time their work is sold, as opposed to current models of payment in the physical world. 
  5. It has also paved the way for novel applications such as DeFi, which aims to create a decentralised financial market without the interference and additional charges from third party service providers!

Are There Limitations to Proof of Stake?

One of the few disadvantages to proof of stake blockchain networks is that of security. 

They are simply not as secure as proof of work based networks. Smart Contracts and Layer-2 add-ons compromise security to a large extent. However, a careful audit of the contracts along with prudent use of the technology can help mitigate instances of malpractice and fraud to a large degree. 

Another disadvantage is that individuals with larger stakes can unduly influence the network and blockchain itself! 

For instance, consider that one individual miner adds an individual block and loses their stake. This creates a fork in the blockchain that other miners can continue to validate and earn transaction fees on. It is cheap to do so considering the lower power requirements of PoS networks!

A Future Full of Promise – And High Stakes!

Despite the limitations of proof of stake blockchain networks, the technology continues to be the consensus mechanism of choice for many blockchain networks and users. With Ethereum shifting over to the technology and even introducing a new cryptocurrency to go with it, proof of stake networks are here to stay and certain to improve!

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