In the operation of blockchain, the consensus mechanism is key to maintaining network security and consistency, and the PoS consensus mechanism selects validators through token staking. This article will delve into the operating principles of the PoS consensus mechanism, revealing how this mechanism ensures the security of transactions and the stable operation of blockchains without relying on high energy-consuming computing processes.
What is PoS?
Proof of Stake (PoS) is a consensus mechanism used for blockchain that selects validators by staking cryptocurrencies, who are responsible for confirming transactions and creating new blocks.
The financial network Nerdwallet points out that PoS does not require massive energy consumption to perform complex mathematical calculations, unlike traditional Proof of Work (PoW), but instead votes based on the amount of tokens held by users, making it more environmentally friendly and energy-efficient.
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How does the PoS consensus mechanism work?
In a PoS system, participants can lock their held cryptocurrencies into the network, a process known as 'staking.'
Stakers become candidate block validators, and when they are selected, they are responsible for processing new transactions and verifying their legitimacy, which also gives them the opportunity to earn network rewards. This mechanism not only lowers the technical barriers to participation but also reduces dependence on high-energy-consuming hardware, making it more sustainable than PoW systems.
Image source: (Crypto City) Illustration of how PoS consensus mechanism works
The report from the World Economic Forum in Switzerland indicates that PoS is not without risks or drawbacks. The selection of validators in PoS is based on the amount of tokens held, which may lead to larger token holders having excessive influence; secondly, if technical errors or network attacks occur during the staking process, stakers may incur losses, thereby increasing participation risks.
In general, PoS offers a low-energy consumption blockchain solution with lower participation thresholds, but it also faces challenges such as centralization and security risks.
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What are the differences between PoS and PoW
PoW relies on miners solving complex mathematical problems to validate transactions and generate new blocks, which requires a substantial amount of computational power and leads to high energy consumption, especially in large networks like Bitcoin.
Image source: (Crypto City) Comparison of the differences between PoW and PoS
Compared to PoW, PoS nodes select validators based on the amount of staked cryptocurrency, where validators stake tokens to participate in verification and earn rewards, significantly reducing energy demands. For example, Ethereum reduced its energy consumption by 99.95% after transitioning to PoS.
(Crypto City) has conducted a more detailed comparison of the characteristics of PoW and PoS consensus mechanisms, organized into the following table:
Characteristics
Proof of Work (PoW)
Proof of Stake (PoS)
Validation mechanism through miners solving complex mathematical problems to validate transactions through randomly selected validators with staked tokens energy consumption high, as it requires a large amount of computational power and electricity low, significantly reducing the demand for computational power reward mechanism miners win block rewards through mining competitions validators earn transaction fees by staking tokens and confirming blocks decentralization has centralization risks, large mining pools can control significant computational power theoretically more decentralized, but users with large holdings have more influence security requires controlling over 50% of computational power to launch a 51% attack economic incentives, attackers may lose staked tokens, reducing the motivation to attack entry threshold requires powerful computing capabilities and hardware equipment staking tokens can become validators, with relatively low thresholds
Image source: (Crypto City) Comparison of the characteristics of PoS and PoW consensus mechanisms
It is worth noting the differences in security; PoW's security relies on computational power to prevent attackers from controlling more than 50% of the power to launch attacks, while PoS ensures economic incentives and penalties through staking tokens, where attackers would lose their staked tokens if they act maliciously.
Although PoS theoretically promotes decentralization, large token holders may still wield significant power, and how to avoid excessive concentration of power remains a challenge.
How PoS reduces the risk of 51% attacks
In a PoW system, if an attacker can control more than 50% of the computational power, they can launch what is known as a '51% attack,' manipulate blockchain records, and double-spend cryptocurrencies.
However, in PoS, the cost of such attacks is extremely high. NerdWallet explains that attackers of the PoS mechanism need to hold a large number of tokens to control most of the staked tokens; if the attack fails, they will face the loss of their staked tokens, meaning that PoS significantly increases the cost of attacks through economic structure design.
In addition, PoS-based blockchains like Ethereum also plan to introduce sharding technology to enhance the network's scalability and security. Sharding technology will divide the blockchain network into several smaller parts (called 'shards'), each with its own validators. This approach means that even if an attacker wants to control the entire network, they would need to attack multiple shards simultaneously, significantly increasing the difficulty and cost of the attack.
What are the major cryptocurrencies that use PoS blockchain mechanism?
Currently, several major blockchains employ the Proof of Stake (PoS) consensus mechanism; these cryptocurrencies choose PoS because it is more energy-efficient and has decentralization potential compared to Proof of Work (PoW).
Here are some major cryptocurrencies that adopt PoS:
Ethereum ($ETH)
Ethereum is one of the most well-known cryptocurrencies adopting PoS. Following the 'Merge' upgrade in 2022, Ethereum officially transitioned from PoW to PoS, significantly reducing its energy consumption.
Cardano ($ADA)
Cardano is a blockchain platform based on scientific and academic research, which has adopted the PoS mechanism from the very beginning, focusing on scalability, security, and energy efficiency.
Polkadot ($DOT)
Polkadot is a cross-chain protocol designed to connect different blockchains and facilitate cross-chain transfer of data and resources. It uses the PoS mechanism to verify transactions and ensure network security.
Tezos ($XTZ)
Using the PoS mechanism to facilitate network governance and consensus decision-making, allowing token holders to participate in validation and earn rewards.
Algorand ($ALGO)
Algorand is a blockchain focused on speed and decentralization, adopting a pure PoS mechanism to ensure the decentralization of the network and enable validators to process transactions quickly.
Does the PoS consensus mechanism have drawbacks? 3 potential risks of PoS that cannot be ignored.
Although the PoS consensus has many advantages in energy efficiency and decentralization, it also has some potential drawbacks and challenges. (Crypto City) has summarized the 3 main drawbacks of the PoS mechanism:
Risks of power concentration
Economic risks of 51% attacks
Long-term token locking
In the PoS system, validators are determined based on the number of tokens they hold, with users holding more tokens having a higher chance of becoming validators and obtaining more block rewards. This may lead to the rich getting richer, as participants holding a large number of tokens earn more profits, further consolidating their influence and weakening the network's decentralization.
The World Economic Forum in Switzerland also points out that although PoS is seen as a mechanism to promote broader participation, in reality, due to the economic requirements of staking, many ordinary users find it difficult to independently become validators, leading to the rise of professional institutions or large staking pools.
On the other hand, although PoS effectively reduces the possibility of 51% attacks through economic penalty mechanisms for staking tokens, if attackers have enough capital to control over 50% of the staked tokens, they can still manipulate the network. Although the cost of such attacks is extremely high, it is still possible in cases of uneven token distribution.
Finally, tokens in the PoS system are locked during the staking period and cannot be freely transferred or used. If significant changes or price fluctuations occur in the network, validators may not be able to sell or transfer their assets in time, increasing the risks for participants and affecting investors' flexibility.
