Proof-of-Stake (PoS) is a blockchain consensus mechanism where an algorithm selects block miners. Unlike Proof-of-Work, Proof-of-Stake does not involve competition to release new blocks. The algorithm selects users with more bets at random.
Why Proof-of-Stake?
With Proof-of-Stake, complex equations are no longer affected, so it is unnecessary to have substantial computational power or large amounts of electricity. As an example, we can take Ethereum.
The Proof-of-Stake works by randomly determining the “validator” – the owner of enough Ether to be considered credible. The more Ethers a potential validator, the longer Ether is on their accounts, and the more chance there is of choosing that validator. That validator then invests its Ether (at least 1000) and guarantees that it will genuinely confirm the transactions – it will not falsify or change them. Its Ether is locked in the system for several months. Thus, when a new transaction arrives, the validator verifies it and sends it online to all other validators who confirm this information. For this transaction validation job, the validator takes the transaction costs (commissions) that come with the transaction.
Due to the disappearance of the need to guess combinations, this processing is quick and easy, so it is to generate fake transactions. Because validators have to validate the information with each other (as in school when students correct each other’s exams), it’s almost impossible for validators to decide that a malicious validator’s transaction is credible. For this to happen, the group that validates an illegal transaction must not only be randomly selected at the same time (mathematically impossible) but also have more than 51% of Ether in the set, which is a considerable amount of money.
Moreover, if a malicious validator is in violation, he loses his stake – thus, fraud becomes extremely expensive. Someone with enough money invested in the ecosystem to become a validator also has no reason to sabotage that system. If that happens, his money loses value (due to a scandal he caused himself if he succeeds, or loss of stakes if he does not).
Staking in PoS (Source: Capital.com)
Advantages And Disadvantages
Advantages
- Transaction processing speed.
- Not harmful to the environment (unlike the PoW consensus)
- Not vulnerable to the state – vast amounts of electricity are not needed.
- It can be done on smaller and weaker devices because you don’t need to download a few hundred gigabytes of the entire blockchain. At the same time, there is not as much power consumption, so validation is easily done on mobile devices. This dramatically facilitates the entry of cryptocurrency into the general public.
Disadvantages
- No external factors. Since the stake is guaranteed by the part of the system itself (ex., In order to verify Ethereum blockchain transactions, Ether must be invested), the whole game is “internal .”This means that someone with enough resources to invest exclusively in destroying that system (banks, governments, etc.) can only sacrifice monetary value for an effective attack.
- This is different from Bitcoin, which requires effort, knowledge, hardware, electricity, and time – all external factors.
- “The richer you are, the richer you will be.” For example, those with the most Ethers for the longest time have the highest chances of becoming validators and, thus, the highest chance of serving additional Ethers in their current stock.
- This is different from Bitcoin’s “get rich” system, in which the rich have to invest their wealth in an external factor – electricity, and hardware. Thus, they have a slightly more tangible stake that will hurt them more if they sabotage the network.
Energy Consumption per Transaction (Source: Bankless)
Takeaways
- Proof-of-Stake (PoS) is a blockchain consensus mechanism where an algorithm selects block miners.
- The Proof-of-Stake works by randomly determining the “validator” – the owner of enough Ether to be considered credible.
- If a malicious validator is in violation, he loses his stake – thus, fraud becomes extremely expensive.
- A transaction can be done on smaller and weaker devices without needing a lot of electricity.
