Proof of Stake explained
Benefits, and Differences vs Proof of Work.
In the last article, I explained what Proof of Work (PoW) is, how it outlines the consensus mechanism for a blockchain, the underlying rules by which Miners follow, and I ended it by mentioning its scalability issues as an introduction to today’s article, which is Proof of Stake (PoS).
Both types of “Proof” are consensus mechanisms that define the rules of mining. However, there are mainly 2 things that differentiate PoW and PoS:
the mechanism to determine who gets to mine a block
the collateral to ensure miners are economically incentivized to do the right thing.
Let’s deep dive into both:
PoS Mechanism
If PoW is described as a race where everyone has to participate, put in the hard work to run, and have one final winner, PoS is more of a solo race, where you have one person who is nominated to represent the rest.
You can think of PoS as an exclusive club. If you want to be part of it, you have to put in a certain amount of money as a safe deposit to gain access.
Once you are part of the club, you have the shared responsibility to maintaining and validating collectively the club’s books.
Now, how do you get picked among the entire group to do the job?
Different blockchains consider different factors, such as total coins staked, how long you have been staking, or even randomness, to ensure everyone has a fair shot. Most algorithms will combine all three of these factors, and if you’d like to understand the particular weightage and details, the best way to do so is to read their whitepaper.
PoS Collateral
Previously I explained how PoW incentives no cheating, positive behavior, by making sure all miners put in hard work + hardware and electricity cost. However, this mechanism is inefficient in terms of having to have everyone run the race, for every single block.
With PoS, instead of doing this every time, you only have to lock up a predetermined amount of native coins of that particular blockchain in the network as an entry rule. If you don’t mine your block within a set amount of time, or if there were invalid or fake transactions included, you can lose your staked coins. Therefore, by having your coins at stake, PoS mechanism keeps it real world costly, and hence incentivizing good behavior.
For example, for the upcoming Ethereum 2.0 version, you will have to stake 32 ETH in the network. That’s a lot of money at stake.
What are some of the key benefits PoS offers?
More efficient energy usage – as miners aren’t competing to solve the mathematical puzzle and win the race anymore, the energy usage level is naturally lesser.
Speed - normally, in a PoW set up, the more people participating in the race, the longer the race to solve the algorithmic puzzle. With PoS, there is no need to make it more complicated as there is no racing, so it can be significantly shorter.
Lower entry barrier - following the “no more racing” line, the hardware requirements also go down, together with energy usage, so it’s more affordable to become a miner.
Decentralization – as the entry barrier is lower, more people have access to it, hence increasing participation. At the same time, it should also lead to more nodes (which basically refers to computers) in the network, therefore making it more centralization resistant.
Due to these benefits, PoS is generally considered to be a better mechanism than PoW, which is why the newer blockchain projects are generally PoS (like Cardano and Polkadot), and the ones that have been around longer are in the works to transition to this format, such as Ethereum.
It is worth noting though, that from a risk point of view, the timing and maturity of a blockchain are important factors to consider. If you are/become a PoS blockchain too early, you might risk suffering a 51% attack (which is when coin holders get together to rule as a majority). If you do it too late, then you’ll have scalability issues and people wasting too much energy to mine. It’s a balance here.
Now that we understood Proof of Stake, I’ll be talking about what Staking next, and why it is a great alternative to earn some passive income. Stay tuned!