Proof of Stake (PoS)

What is Proof of Stake (PoS) ?

Proof of Stake (PoS) was first introduced as an alternative consensus mechanism to Proof of Work (PoW) mechanism, to overcome the excessive power consumption issues of Proof of Work and by far now Proof of Stake has become the second most popular consensus mechanism after Proof of Work.

Unlike Proof of Work, in Proof of Stake the miners do not have to compete against each other to solve those complex mathematical puzzles in order to validate a transaction. The Proof of Stake states that a person can mine or validate block transactions according to how many coins they hold. This means that the more coins owned by a miner, the more mining power they have.

The concept of proof-of-stake was introduced by Scott Nadal and Sunny King in 2012, and it was first adopted by Peercoin blockchain in 2013. It started as PoW but gradually moved to a mixed PoW and PoS setup. As mining peercoins became less attractive the users could switch to producing blocks by staking their coins in the network. Then a number of blockchain projects such as Nxt, Blackcoin, Polkadot, Tezos, Cardano and some other projects also implemented the Proof of Stake consensus mechanism. The move of Ethereum to PoS has been long anticipated by market participants.

Variants of Proof-of-Stake

• Regular Proof-of-Stake – The one discussed in this article.
• Delegated Proof-of-Stake
• Leased Proof-of-Stake
• Masternode Proof-of-Stake 

Proof of Stake Vs. Proof of Work

Some argue proof-of-work has problems. As bitcoin mining has become concentrated, the 51% attack theory, some groups have become more powerful than Bitcoin’s creator intended. And Bitcoin currently uses at least as much energy as all of Switzerland. They energy consumption curve tends to be continuously upward by bitcoin miners. Others argue it’s not that bad because the current financial system also uses plenty of energy.

With proof-of-work, miners are more likely to add additional blocks to the blockchain if they have more computational power, which is fueled by electricity.
And in proof-of-stake, miners are more likely to win additional blocks if they have more money. In other words, proof-of-stake relies on “proof” of how much “stake” users have. 

Some argue that Proof of Stake also takes the currency towards the centralized control again, as more the money, more the transaction validating power.

How does Ethereum's Proof of Stake works?

Unlike proof-of-work, validators don't need to use significant amounts of computational power because they're selected at random and aren't competing. They don't need to mine blocks; they just need to create blocks when chosen and validate proposed blocks when they're not. This validation is known as attesting. You can think of attesting as saying "this block looks good to me." Validators get rewards for proposing new blocks and for attesting to ones they've seen.

If you attest to malicious blocks, you lose your stake.

Security in Proof of Stake with reference to Ethereum blockchain

The threat of a 51% attack still exists in proof-of-stake, but it's even more risky for the attackers. To do so, you'd need to control 51% of the staked ETH. Not only is this a lot of money, but it would probably cause ETH's value to drop. There's very little incentive to destroy the value of a currency you have a majority stake in. There are stronger incentives to keep the network secure and healthy.

Stake slashings, ejections, and other penalties, coordinated by the beacon chain, will exist to prevent other acts of bad behavior. Validators will also be responsible for flagging these incidents.

Final Words

Proof-of-stake is a relatively new technology. It has gained popularity quickly as an energy-efficient and novel alternative to proof-of-work. The future PoS developments will depend on how it proves itself in real applications and what alternative solutions appear on the market to address security, scaling, and decentralization. The main advantages of the Proof of Stake algorithm are energy efficiency and security.

It’s good to remember that the cryptocurrency industry is rapidly changing and evolving and there are also several other algorithms and methods being developed and experimented with.