Proof of Stake (PoS)

What is Proof of Stake? Definition, How It Works, PoS vs PoW

What is Proof of Stake (PoS)?

Proof of stake (PoS) is a consensus mechanism used by blockchain networks to validate and authenticate cryptocurrency transactions and achieve agreement on the state of the ledger. By definition, proof of stake mechanisms use validators that stake, or lock, their cryptocurrency holdings to the blockchain to have the right to compete to validate blocks of transactions and add them to the chain.

PoS aims to provide a more energy-efficient, scalable, and economically incentivized approach to achieving decentralized consensus on distributed ledger networks.

Techopedia Explains the Meaning of Proof of Stake (PoS)

PoS was developed to improve scalability and consume less energy than its predecessor proof of work (PoW), meaning proof of stake has redefined how decentralized networks validate transactions and maintain the integrity of their ledgers.

In a decentralized network such as a blockchain, there is no central authority to validate transactions and maintain the integrity of the ledger. Instead, consensus mechanisms allow network participants, known as nodes, to work together to agree on the order and validity of transactions, ensuring that all nodes reach the same conclusion about the state of the blockchain.

By leveraging PoS, blockchain networks can achieve consensus in a more energy-efficient manner, reducing the environmental impact associated with traditional PoW-based systems. PoS also offers scalability advantages, as it reduces the computational overhead required to validate blocks, enabling faster transaction processing and network throughput.

How Proof of Stake Works

The PoS mechanism is based on the concept of staking, which requires validators running computer systems to lock up a certain amount of their cryptocurrency coins to the blockchain. These coins serve as collateral to participate in the validation and creation of new blocks containing transactions to add to the chain.

The staked amount serves as a security deposit, incentivizing validators to act honestly and adhere to the network’s rules. The higher the stake, the greater the likelihood of being selected as a validator, so validators have a vested interest in upholding the network’s integrity to safeguard their staked assets.

Selected validators take turns proposing new blocks to be added to the blockchain. The validator creates a new block containing a batch of valid transactions, typically prioritizing transactions with higher fees or those that have waited the longest in the transaction pool.

Once a validator proposes a block, other validators in the network verify that the transactions included in the block adhere to the network’s consensus rules and have not violated any protocol guidelines, such as double-spending or invalid signatures.

Consensus is reached when a supermajority of validators agree on the validity of the proposed block. This agreement is typically achieved through mechanisms such as Byzantine Fault Tolerance (BFT) or Delegated Proof of Stake (DPoS), where a predefined number of validators must signal their acceptance of the proposed block.

Once a block has been validated and accepted by the network, it is added to the blockchain and becomes part of the immutable ledger. This process ensures that all participating nodes in the network maintain a consistent view of the transaction history, preventing double-spending and ensuring the integrity of the blockchain.

In return for their participation, validators are rewarded with additional cryptocurrency tokens – typically a share of the transaction fees in proportion to their staked amount and how long they leave their coins locked to the network.

How Proof of Stake Works — Source: immunebytes

Different PoS mechanisms can use various methods to reach consensus. For example, on blockchains that use sharding, which splits up batches of transactions into shards for faster processing, validators that verify the transactions add them to a shard block, which requires a certain number of validators to form a voting committee to come to a consensus that a block is valid and can be closed.

Proof of Stake on Ethereum 2.0

Ethereum 2.0, the highly anticipated upgrade to the Ethereum blockchain, represents one of the most significant implementations of PoS to date. Ethereum made the transition from PoW to PoS to address scalability concerns and create a more sustainable and economically viable blockchain ecosystem.

The Ethereum proof of stake mechanism, known as the Beacon Chain, introduces validator nodes that stake Ether (ETH) coins to secure the network and earn rewards for their contributions. To become a validator on Ethereum 2.0, participants must stake a minimum of 32 ETH, locking up their coins in a smart contract on the Ethereum 1.0 chain and effectively transferring it to the Beacon Chain. Validators receive rewards for their participation in the form of additional ETH.

Ethereum 2.0 implements a finality mechanism known as Casper Friendly Finality Gadget (FFG). Casper FFG introduces the concept of “finalized blocks,” which are blocks that have achieved irreversible consensus across the network, aiming to reduce the risk of chain reorganizations and double-spending attacks.

Which Cryptocurrencies Use PoS?

Several cryptocurrencies use PoS as their consensus mechanism aside from Ethereum, including:

Cardano (ADA)
Polkadot (DOT)
Tezos (XTZ)
Algorand (ALGO)

These networks use PoS to achieve consensus efficiently and sustainably, offering an alternative to the resource-intensive PoW.

Proof of Stake vs. Proof of Work

PoS and PoW are two different approaches to achieving consensus on a blockchain network. Unlike PoW, which relies on computational power and competitive mining to validate transactions, PoS operates on the premise of validators staking their cryptocurrency holdings to process blocks based on their stake size.

PoS Security

Slashing Penalties

By staking their cryptocurrency holdings as collateral, validators have a vested interest in maintaining the value and security of the network. They risk losing a portion of their staked assets if they are found to engage in malicious behavior or violate network rules, such as double-signing blocks, attempting to manipulate consensus, or failing to fulfill their duties. Slashing penalties incentivize validators to act honestly and uphold the network’s integrity.

Randomized Selection Mechanisms

PoS networks also implement these mechanisms to assign validators to propose and verify blocks. This ensures that the process of block creation remains unpredictable and resistant to manipulation. As validators’ assignments may rotate over time, it is difficult for any single entity to exert disproportionate influence over the network.

Resilience Against Attacks

PoS networks are designed to withstand various forms of attacks and disruptions through mechanisms such as Byzantine Fault Tolerance (BFT) and adaptive consensus algorithms, which can tolerate a certain degree of malicious behavior or network failures without compromising overall consensus.

Vulnerabilities and Challenges

Long-Range Attacks

PoS networks are susceptible to long-range attacks, in which an attacker with a significant stake size can attempt to rewrite the blockchain’s history by creating an alternative chain from a previous timestamp. Unlike PoW, where rewriting history requires enormous computational power and is economically prohibitive, PoS allows attackers to stake their tokens on multiple chains simultaneously, making long-range attacks more feasible.

Nothing at Stake Problem

Similarly, as PoS validators can theoretically validate multiple chains without incurring significant costs, they have little to lose by validating multiple conflicting blocks or chains simultaneously, leading to chain fragmentation and consensus ambiguity. This is known as the “Nothing at Stake” problem. While various techniques, such as slashing penalties and checkpoints, aim to mitigate the problem, it remains a persistent concern in PoS networks.

Sybil Attacks

PoS networks can also be vulnerable to Sybil attacks, in which an attacker creates multiple pseudonymous identities (sybils) to gain a disproportionately large influence over the network. Attackers can increase their chances of being selected to validate blocks and potentially exert control over network consensus by distributing their stake across multiple validator nodes.

Proof of Stake Pros and Cons

Pros

Environmentally sustainable
Efficient transaction processing
Incentivized honesty
Security measures
Faster transaction finality
On-chain governance

Cons

Centralization risk
Vulnerability to attacks
“Nothing at Stake” problem
Economic centralization
Exclusion of smaller participants
Dependency on active validators

The Bottom Line

Proof of stake represents an evolution in the development of blockchain consensus mechanisms, offering energy-efficient and scalable alternatives to the traditional proof of work approach.

PoS allows network participants to stake their cryptocurrency to the blockchain, rather than having to invest in expensive mining rig hardware. Staking provides an incentive for validators to contribute to the blockchain’s integrity and security, although it also presents opportunities for malicious attackers to gain control. Variations on PoS mechanisms are likely to emerge as blockchain developers look for ways to increase blockchain security and efficiency while limiting their environmental impact.