What is Proof-of-Stake (PoS) in Cryptocurrency?

Proof-of-Stake (PoS) is a fundamental concept in the world of blockchains and cryptocurrencies. At Everstake, PoS is not just a technology, it is the basis of our activity, which allows us to provide you with safe, convenient and affordable staking.

In this article, we’ll cover the basics of PoS, including how it works and its advantages and disadvantages over PoW. Whether you are a beginner or an experienced investor, this article will provide a clear overview of Proof-of-Stake and its features. 

Definition of PoS

Proof-of-Stake (PoS) is a consensus mechanism some blockchain networks use to achieve distributed consensus. It is an alternative to the Proof-of-Work (PoW) mechanism used by Bitcoin and involves miners solving complex tasks to verify transactions and create new blocks.

Instead of mining, the Proof-of-Stake system chooses validators to verify transactions and create new blocks. The choice of validator depends on the number of coins the validator stakes. Those who invest more in the network are more likely to be trustworthy and have the network’s best interests at heart.

Why and how did Proof-of-Stake appear?

A few years after the launch of Bitcoin, it became clear that the Proof-of-Work principle led to a constant increase in mining power and electricity costs. In addition, due to the need to use powerful equipment, the availability of mining decreased.

On July 11, 2011, the idea of an alternative consensus mechanism for cryptocurrencies, called Proof-of-Stake, was proposed. The main idea is that the right to vote in the decentralized network should be given to all its participants depending on what share of the total number of coins they own.

This new consensus mechanism received its first practical implementation in the PPCoin cryptocurrency in August 2012. New coins were distributed through mining, and transactions could be processed by any node that stored the PPC cryptocurrency. The same hybrid consensus scheme was used in other early PoS projects, such as Gridcoin and Blackcoin. The first “pure” PoS cryptocurrency without mining was the Nxt blockchain, launched on November 24, 2013.

The Proof-of-Stake consensus mechanism proved so successful and flexible that, in the following years, it was implemented in hundreds of cryptocurrencies in various variants and modifications.

How does Proof-of-Stake work?

To understand the working mechanism of Proof-of-Stake, you need to know the role of validators and staking. Generally, any coin holder can be a validator, staking a certain number of coins as collateral. The rules and minimum coin amount may vary depending on the blockchain network.

To create a new block, the PoS protocol selects a validator from the pool of those who have staked their coins. The choice is based on various factors. First, preference is given to the richest network nodes. Unique methods may be used periodically, such as random selection of blocks and selection by staking duration.

The selected validator checks the validity of the transactions in the block, signs the block, and adds it to the blockchain. In exchange for their work, validators receive a transaction fee. Sometimes, these coins may be distributed proportionally to the staking amount.

To prevent dishonest behavior, many PoS systems use a mechanism known as “slashing”. If a validator fails to perform its validator duties, some of its tokens may be “slashed” or deleted. This serves as a powerful incentive to act in the network’s best interests.

What is Proof-of-Work?

Proof-of-Work is the original crypto consensus mechanism first used by Bitcoin. Proof-of-work blockchains are secured by miners around the world competing to be the first to solve a mathematical puzzle. The winner updates the network and adds a new block to the blockchain with confirmed transactions. For this, he receives a reward in cryptocurrency from the network.

It is a proven, reliable way to maintain a secure decentralized blockchain. As cryptocurrency grows, more miners want to join the network, thereby supporting its power and security.

However, the main problem with PoW is that mining requires immense computing power and expensive equipment for work. That is why Proof-of-Stake has become an excellent alternative with lower energy consumption. Let’s take a closer look at the differences.

The difference between Proof-of-Work and Proof-of-Stake

The fundamental difference between Proof-of-Work vs Proof-of-Stake is the method of verifying transactions and creating new blocks. While Proof-of-Work relies on miners solving complex mathematical problems, Proof-of-Stake relies on validators who are chosen based on their stake in the network. This difference has several implications for energy consumption, security and management.

In the PoW system, miners compete to solve complex mathematical problems that require significant computing resources and energy. For this, miners need powerful computers that can quickly solve the request. The first miner to solve the problem gets the right to add a new block of transactions to the blockchain.

Proof-of-Stake became an alternative mechanism that addressed some of the limitations of Proof-of-Work, especially its environmental impact. In a PoS system, the creation of new blocks is based on the stake in the cryptocurrency (the amount of currency they hold) rather than on computational work.

Advantages of Proof-of-Stake 

Proof-of-stake offers several benefits over Proof-of-Work, but it also has its own set of challenges. Let’s take a closer look.

Energy efficiency

Unlike Proof-of-Work, which requires massive computing power to mine blocks, PoS achieves consensus through validators using their cryptocurrency as a form of security. Of course, this significantly reduces energy consumption by eliminating the need for energy-intensive mining operations.

Scalability

PoS can process more transactions per second than PoW-based systems. The block verification process requires fewer resources, thus reducing the processing time.

Security

Proof-of-Stake reduces the probability of a 51% attack (when organizations gain control of most of the mining capacity). It is not financially justified for a validator to own 51% of stake coins, making the network more secure.

Low barriers to entry

Proof-of-Stake doesn’t require validators to invest in expensive equipment, so it is much easier to become validators than miners. This could lead to a more decentralized network.

Reducing the risks of centralization

In PoW, mining power is concentrated among a few large mining companies that can afford significant hardware and energy costs. PoS mitigates this risk by tying the probability of transaction validation to the amount of currency the validator makes.

Drawbacks of PoS

Despite the significant advantages of POS, the network has some complexities that affect the security and convenience of staking. There is some of them:

Forking differences

The Proof-of-Stake (PoS) model has no strong deterrent against verifying transactions on either side of the blockchain split. The proof-of-work (PoW) system makes such actions inefficient due to high energy costs. This makes PoS more amenable to participants, but PoS relies on penalties and economic incentives to encourage validators to choose the ‘correct’ chain

Admission requirements

To participate in PoS staking, a validator must first purchase specific blockchain tokens. The amount required for effective participation may require significant upfront costs. While some PoS systems have high staking requirements, others have lower barriers to entry. Some allow staking with smaller amounts or through delegating your stake to another validator (pooling). 

PoW mining also has ongoing costs, such as electricity and equipment maintenance. Meanwhile, PoW allows, for example, the ability to rent mining equipment and start to verify transactions faster.

Vulnerability to attacks 51%

Although both PoW and PoS are susceptible to 51% of attacks, the risk profiles are different. A PoW attack requires enormous computing power and, therefore, high energy consumption. This makes large-scale 51% PoW attacks on the blockchain very expensive. In PoS, an attacker needs to purchase a large amount of the cryptocurrency itself.

However, there are several economic obstacles:

• An attack on the network will most likely cause the price of the token to fall, harming the attacker who holds a significant stake.
• Most PoS systems penalize validators who misbehave, meaning an attacker may lose their staked coins.

Proof-of-Stake on Ethereum 2.0

Ethereum 2.0 is the next in a series of transformations for the Ethereum chain, migrating it from the power-consuming Proof-of-Work (PoW) consensus algorithm to the sustainable Proof-of-Stake mechanism with its Beacon Chain. The Beacon Chain went live on December 2020 and is the first in a series of major upgrades to increase Ethereum’s ability to handle transaction loads more sustainably.

This shift aims to make the Ethereum network more scalable, secure and sustainable. The validator selection procedure in Ethereum 2.0 utilizes a PoS mechanism instead of relying on computational power to solve the puzzles. 

As this action significantly decreases the amount of energy consumed, it also enables the network to accommodate more validators due to the easy entry of new participants coupled with less rigorous institutional requirements.

The adoption system in PoS Ethereum 2.0 sets a platform for future advancements that focus on creating a more efficient, secure, and decentralized network. This is possible through the combat of some of the significant early scaling issues Ethereum has been facing as well as the environmental side effects.

What is restaking?

Restaking is the ability to reuse ETH on the Ethereum mainnet or in liquid staking pools as reverse tokens on platforms that implement the EigenLayer protocol. The resulting coins can be sent to test the security quality of third-party networks outside of EVM.

The most important feature is the ability to withdraw locked coins from the Beacon Chain deposit contract. This update caused an influx of market liquidity. When the Proof-of-Stake algorithm was refined to an understandable and secure model, staking provided passive income at the level of PoW mining.

In addition, the Shapella hard fork, removing several restrictions in the network architecture, formed the necessary basis for developing new directions and their implementation. One of these vectors was restaking.

In regular staking, the user blocks tokens in the pool and receives interest as a reward for maintaining the network. Coins usually remain unavailable to the depositor for the term specified in the smart contract.

In the case of restaking, tokens can be restaked in other pools, including after liquid staking. This allows you to earn additional income and participate in other DeFi projects.

Types of PoS

Actually, there are many types of PoS concepts. Each of them is designed to solve specific problems or optimize certain aspects of the staking and verification process. Let’s look at the main ones:

• Delegated Proof-of-Stake (DPoS). In DPoS, coin holders vote for a selected number of delegates to create new blocks. This approach significantly reduces the number of nodes required to participate actively in the consensus process, increasing transaction speeds and reducing latency.
• Leased Proof-of-Stake (LPoS). LPoS allows coin holders to “lease out” their stakes to a full node, which then participates in the validation process on their behalf. This system allows even holders of a small number of coins to participate in the process of validating transactions and receive rewards for doing so, thereby increasing the overall security and decentralization of the network.
• Pure Proof-of-Stake (PPoS). PPoS emphasizes true randomness in selecting validators to make the consensus process more decentralized and fair.

Conclusion

Proof-of-stake (PoS) is becoming a major contender as a replacement for traditional Proof-of-Work (PoW) blockchains. This system relies on the economic stake in the game to verify transactions and create new blocks, which minimizes power consumption and thus allows anyone to participate in the process of creating new blocks of data.

These technologies include a blockchain model that paves the way for improved features such as scalability, security, and decentralization. However, it is worth knowing that PoS has its own challenges, which can include vulnerability to certain types of attacks and centralization due to stake concentration.

FAQ

Can anyone participate in the Proof-of-Stake system?

Anyone who owns cryptocurrency of a particular blockchain can participate in staking. Some blockchains have different entry requirements, such as a minimum number of coins you stake.

Are there any risks associated with staking in Proof-of-Stake?

The main risk is the possibility of a decrease in the value of the cryptocurrency you have chosen for staking. Additionally, some blockchains may penalize validators for misbehavior or improper validation, which may result in the loss of some of your funds.

How are PoS validators rewarded?

Basically, validators in a PoS crypto system are rewarded with transaction fees. In some cases, the payout may be in new Proof-of-Stake coins. The specific reward mechanism may vary between PoS blockchains.

Does staking guarantee verification rights in PoS?

This may not be enough. In many PoS systems, validators are chosen randomly from those who have staked their coins. However, the more coins you stake, the higher your chances of being selected as a validator.

Is Proof-of-Stake more secure than Proof-of-Work?

Both systems have their strengths and weaknesses in terms of security. PoS aligns the incentives of validators with the success of the network, as their coins can lose value if the network is compromised. For this, PoS networks carefully develop mechanisms to prevent various stake attacks.

Can I unstake my Proof-of-Stake coins at any time?

It depends on the specific rules of the blockchain network. Some networks may require a period of time before coins can be withdrawn from the stack.

How does Proof-of-Stake affect blockchain governance?

PoS can facilitate more community-driven governance. Stakeholders can have a say in the network’s future development and suggest improvements.