Brief Summary
Proof of Stake is a popular alternative consensus mechanism to Proof of Work. The computing power required to verify transactions has been replaced by the requirement for validators to stake their coins. The lack of need for computing power also greatly reduces the required energy consumption. Proof of Stake also increases decentralization, security and scalability.
However, if there is no access to crypto, accessing Proof of Stake may also be more difficult. A 51% attack on blockchains with low market value can also be organized more easily. Since Proof of Stake is versatile, it has many different versions for different blockchains and use cases.
Entrance
Proof of Stake is by far the most popular option among blockchain networks today. However, since there are many different variations of this mechanism, it can be difficult to understand its basic concepts. Nowadays, it is not possible to see Proof of Stake as it was first released. However, all types of Proof of Stake share the same important core concepts. Understanding these similarities will enable you to make better choices about the blockchains you use and understand how these blockchains work.
What does Proof of Stake mean?
The Proof of Stake consensus algorithm was introduced on the Bitcointalk forum in 2011. It was proposed as a solution to the problems experienced by Proof of Work. While both of these mechanisms have the common goal of ensuring blockchain consensus, the processes they use are quite different. Participants must simply prove that they have staked coins, rather than submitting a calculation-intensive proof.
How does Proof of Stake work?
The Proof of Stake algorithm uses a pseudo-random elimination process to select validators from a group of nodes. System; It uses a combination of factors such as staking time, the element of randomness, and how many coins the node has.
In Proof of Stake systems, blocks are “mined” rather than mined. But you may also hear the term "dig" used occasionally. Most Proof of Stake cryptocurrencies are launched with a “pre-mined” supply of coins to allow nodes to start working immediately.
Participants involved in the mining process must lock a certain amount of coins in the network as stakes. The size of the staked amount determines the node's chance of being selected as the next validator - the higher the staked amount, the greater the chance. Some unique methods are added to the selection process to ensure that the advantage is not only in the hands of the nodes with the most coins in the network. The most commonly used methods are Randomized Block Selection and Coin Age Selection.
Randomized Block Selection
In the Randomized Block Selection method, validators are selected by searching for nodes with the lowest hash value and highest stake. Since stake sizes are public, other nodes can often predict who will create the next block.
Coin Age Selection
The Coin Age Selection method selects nodes based on how long their tokens have been staked. Coin age is calculated by multiplying the number of coins staked by the number of days the coins have been staked.
When a node creates a block, the coin age is reset and it must wait a certain amount of time to create a new block. Thus, nodes staking high amounts are prevented from dominating the blockchain.
Verification of transactions
All cryptocurrencies that use the Proof of Stake algorithm use unique rules and methods to create the best possible combination for the network and its users.
When the node that will create the next block is selected, this node checks whether the transactions in the block are valid. It then signs the block and adds it to the blockchain. As a reward, the node receives the transaction fees on the block and, in some blockchains, an additional coin reward.
If the node wants to stop creating blocks, its staked amount and rewards will be released after a certain period of time. This way, the network has time to verify whether a fake block has been added to the blockchain by that node.
Which blockchains use Proof of Stake?
Most blockchains introduced after Ethereum use the Proof of Stake consensus mechanism. This mechanism is often modified to suit the needs of the network. We will talk about these variations later in our article. Ethereum itself is currently in the process of transitioning to Proof of Stake with Ethereum 2.0.
Blockchain networks that use Proof of Stake or some form of this mechanism include:
1. BNB Chain
2. BNB Smart Chain
3. Solana
4. Avalanche
5. Polkadot
Advantages of Proof of Stake
Proof of Stake has many advantages over Proof of Work. Therefore, new blockchains almost always use Proof of Stake. Pros of Proof of Stake include:
adaptability
As the needs of users and blockchains change, Proof of Stake may also change. This is pretty easy to see considering there are many adaptations available. The mechanism is versatile and can easily adapt to most use cases of blockchains.
decentralization
Since the cost is lower, more users are encouraged to run nodes. This process of incentivization and randomization also makes the network more decentralized. While there are staking pools, the odds of a user successfully creating a block are much higher in Proof of Stake. Overall, this reduces the need for staking pools.
Energy efficiency
Proof of Stake is vastly superior in energy efficiency compared to Proof of Work. The cost of becoming a participant is based on the economic cost of staking coins rather than the computational cost of solving puzzles. This mechanism greatly reduces the energy required to run the consensus mechanism.
Scalability
Proof of Stake is more scalable as it does not require physical machines to capture consensus. There is no need for huge mining farms or large energy sources. Adding more validators to the network is cheaper, simpler and easier.
Security
Staking serves as a financial motivator for the validator not to conduct fraudulent transactions. If the network detects a fraudulent transaction, the validator loses a portion of the staked amount and the right to participate in the future. As long as the staked amount is higher than the reward, the validator will lose more coins than he will gain from a fraudulent transaction.
In order for the node to effectively control the network and confirm a fraudulent transaction, it must have a majority of the amount staked in the network. This type of attack is called 51% attack. Depending on the value of the cryptocurrency, it may be nearly impossible to gain control of the network because you would need to own 51% of the circulating supply.
But as we will explain shortly, this can also be a disadvantage.
Disadvantages of Proof of Stake
Although Proof of Sake offers many advantages over Proof of Work, it also has some weaknesses:
Bifurcation
In a standard Proof of Stake mechanism, there are no disincentives to continue operating on either side of a fork. Working on both sides in Proof of Work wastes energy. In Proof of Stake, the cost is much lower, which means people can “try their luck” on either side of the fork.
accessibility
To start staking, you need the blockchain's native token. This requires you to purchase the token through an exchange or other method. Depending on the amount required, you may need to make a significant investment to start staking effectively.
At Proof of Work, you can buy or even rent cheap mining equipment. In this way, you can quickly join a pool, start making money and earning money.
51% attack
Although the vulnerability to 51% attacks also applies to Proof of Work, these attacks may be much easier to carry out in Proof of Stake. If the price of the token drops too much or the market cap of the blockchain is low, it will theoretically be cheaper to buy more than 50% of the tokens and control the network.
Comparison of Proof of Work and Proof of Stake
When we compare the two consensus mechanisms, there are some key differences.
However, there are many different types of Proof of Stake mechanisms used by blockchains. Much of the difference depends on exactly which mechanism is used.
Other consensus mechanisms built on Proof of Stake
Proof of Stake is very adaptable. Developers can modify the mechanism to fit a blockchain's unique use cases. The most common versions are:
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake allows users to stake coins without a validator. In this case, they stake their coins behind a validator to share the block rewards. The more delegates stake behind a potential validator, the higher the chances of that validator being selected. Validators often vary the amount to be shared with delegates as an incentive. A validator's reputation is also an important factor for delegates.
Nominated Proof of Stake (NPoS)
Nominated Proof of Stake is a consensus model developed by Polkadot. Although it has many similarities with Delegated Proof of Stake, it has an important difference. If a nominator (delegate) stakes behind the back of a malicious validator, he or she also loses the amount he staked.
Nominators can select up to 16 validators to stake. In this case, the network will distribute the staked amount equally to the selected validators. Polkadot also uses different approaches of game theory and election theory to determine who creates a new block.
Proof of Staked Authority (PoSA)
BNB Smart Chain uses Proof of Staked Authority to ensure network consensus. This consensus mechanism combines Proof of Authority and Proof of Stake, allowing validators to create blocks sequentially. The mechanism features a group of 21 active validators who are selected based on the amount of BNB they have staked or have been staked behind them. This group is determined daily and the selection is kept on BNB Chain.
Last word
The way blocks of transactions are added to the network has changed considerably since Bitcoin. It is no longer necessary to use computing power to achieve crypto consensus. The Proof of Stake system has many advantages and in retrospect it seems that this system works. As time progresses, it seems that Bitcoin will remain one of the very few networks that operate with Proof of Work. On the other hand, Proof of Stake looks like it will continue to exist for a long time.
