What is Proof of Stake (PoS)

Whitney Anderson
Whitney Anderson
Technology Writer
Last updated: May 18, 2024
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Validation and authentication of cryptocurrency transactions as well as agreement on the state of the ledger by blockchain networks can be done through proof of stake (PoS) which is a consensus mechanism. That means, by definition, validators stake their crypto assets or lock them up with the blockchain so that they can compete for validating blocks of transactions and adding them onto the chain.

To achieve decentralization on distributed ledger networks, PoS seeks to offer a more energy-efficient approach that is scalable and economically incentivized.

XPS.NET Explains Proof of Stake

Meaning of Proof of Stake

Proof of stake aims at being more scalable than its predecessor proof of work (PoW) while consuming less power; hence it has changed how decentralized systems validate transactions and keep track of their ledgers’ integrity.

In a decentralized network like the blockchain, there is no central authority responsible for verifying transactions and maintaining the integrity of the ledger. Instead, protocols ensure that all nodes agree on transaction order and validity so that every node comes up with the same conclusion about what happened in the blockchain.

By using PoS, blockchains can reach consensus more efficiently in terms of energy consumption thus reducing the environmental impact brought about by traditional PoW systems. Additionally, this method improves scalability since it lowers the computational overhead needed for validating blocks thereby enabling faster processing speed for transactions and higher network capacity utilization.

How Does Proof-of-Stake Work?

This mechanism relies upon staking where validators are required to lock some amount of (cryptocurrency coins) into the blockchain from their computer systems. These coins act as collateral used during the validation process together with the creation of new blocks containing transactions which should be added onto the chain.

The purpose behind having such high stakes is that if you have large amounts at risk then individuals must have strong incentives not to cheat otherwise they would lose everything; therefore ensuring honesty throughout the system. 

From time to time, certain validators are selected; those particular ones take turns when proposing fresh blocks meant for inclusion into the blockchain. In most cases, validators create a new block that includes a group of valid transactions with preference given to transactions having higher fees or those which have been waiting for longer periods in the transaction pool.

When one validator proposes a block, other validators within the network check if all transactions included in the proposed block adhere to the consensus rules of the network and have not breached any protocol guidelines like double-spendings or invalid signatures, etc. 

Consensus is said to be reached only when majority validators agree on whether the proposed block is valid or not. Byzantine Fault Tolerance (BFT) or Delegated Proof of Stake (DPoS) can be used as mechanisms for achieving such agreement where a predetermined number of validators are required to signal their acceptance towards a given proposed block.

After being approved by the network, blocks are combined into an unchangeable record named blockchain; thus, every node in the system has an identical transaction history view; such a mechanism avoids fraudulent acts with the same money and safeguards the general reliability of the blockchain.

To show their involvement, validators receive extra digital coins – generally, a percentage of fees paid per transaction according to their stakes and the duration for which they keep their coins locked by the system.

Different PoS protocols can employ different techniques to achieve consensus. For instance, in blockchains based on sharding (where large sets of transactions are divided into smaller parts for faster processing), validators who authenticate these transactions add them to a shard block. This requires a certain number of validators to constitute a voting committee that should agree on whether a block is valid or not before it gets closed.

How Proof of Stake Works
Source: immunebytes

Proof of Stake in Ethereum 2.0

The most awaited upgrade of Ethereum’s blockchain network is Ethereum 2.0 which also happens to be one of the biggest adoptions of PoS so far. The transition from PoW to PoS was made by Ethereum for scalability reasons among others to create a sustainable economic environment around its blockchain.

Known as the Beacon Chain, Ethereum’s proof-of-stake mechanism introduces validator nodes which stake Ether (ETH) coins for network security purposes as well as earning incentives based on their contributions. To become an eth2 validator one has to stake at least 32 ETH which involves locking up their coins through a smart contract on eth1 and effectively transferring ownership over them onto the beacon chain where they will remain until withdrawn or slashed accordingly. Participants get rewarded with additional ETHs if they validate blocks correctly, being that all this is done while following rules set forth by developers thus ensuring safety within the Ethereum platform.

The finality mechanism implemented in Eth2 is called Casper Friendly Finality Gadget (FFG). Blocks finalized under Casper FFG are those that have achieved irreversible consensus across the network thereby minimizing chances for chain reorgs and double-spend attacks too.

Other Cryptocurrencies using PoS

Apart from Ethereum, other cryptocurrencies which use proof-of-stake include; Cardano [ADA], Polkadot [DOT], Tezos [XTZ] and Algorand [ALGO].

Sustainability and efficiency are among the key features of why these networks opted for POS consensus over POW which is known to consume more resources before validating transactions.

Proof of Stake vs Proof of Work

PoS and PoW as mechanisms for achieving agreement on a blockchain differ in their approach. Unlike proof-of-work where transaction validity relies upon computational power and competitive mining, proof-of-stake assumes that validators will process blocks according to the size of stake they hold within a given cryptocurrency system.

Security Measures in POS

Slashing Penalties: Validators have an economic incentive to maintain network security by staking some amount of digital currency. If found guilty of malicious activity or breaking protocol rules such as double signing blocks, trying to manipulate consensus or failing on duties; a portion or all their stake may be forfeited thus making them lose value in terms of monetary cost attached to this action. This also acts as motivation towards honest behavior from validators who should always act based on what is best for overall healthiness concerning said projects’ sustainability

Long Distance Attacks: Large-scale attacks are possible within PoS networks. The attacker creates an alternative chain from a previous timestamp by pouring a large amount into a stake size. Unlike PoW, where rewriting history is computationally intensive and economically infeasible, under PoS attackers can bet their tokens on multiple chains at once thereby enabling such kind of attack.

Nothing at Stake Problem: Similarly to the above point, as validators for proof-of-stake systems can validate multiple chains concurrently without much cost, they may validate several conflicting blocks or chains at the same time resulting in chain splintering and consensus ambiguity which is known as ‘nothing at stake’ problem. Although different techniques (slashing penalties or checkpoints) have been introduced to solve this issue, it still remains problematic for many POS-based networks.

Sybil Attacks: Additionally POS networks could suffer from Sybil attacks – where an attacker produces multiple pseudonymous identities(sybils) so that he/she has disproportionate control over the network governance process by distributing his stake across many validator nodes thus increasing chances of being selected to validate blocks and potentially manipulating network consensus.

Pros and Cons

Pros

  • Eco-friendly: Power consumption is much lower than that under proof of work hence making it an environment-friendly option.
  • Higher throughput in transaction processing: It enables faster transaction processing with reduced computational overheads.
  • Financially driven honesty: There are incentives for validators to always act honestly and maintain integrity because any malicious behavior will lead to them losing all their staked assets forever.
  • Security features: Slashing penalties among others are used by PoS networks to ensure security while also ensuring decentralization through random selection mechanisms employed for this purpose.
  • Faster Finality of Transaction: Validators can achieve consensus more easily without doing heavy computation therefore leading to faster finality transactions within POC Networks
  • On-Chain Governance: In most cases, there is usually some form of chain governance model applied where stakeholders can participate in protocol upgrades through voting rights etc.

Cons

  • Risk of Centralization: There is always a possibility that large stakeholders may tend to be chosen more often than small ones leading towards centralisation risks
  • Vulnerabilities to Attacks: A long-range attack which leads to a ‘nothing at stake’ problem; depends on the number of validators active in the system
  • “Nothing at Stake” problem: This refers specifically to the fact that validators can validate multiple conflicting chains without suffering any financial loss thus creating ambiguous consensus rules and destroying chain integrity.
  • Economic centralization: It requires a huge amount of cryptocurrency as collateral for one to become a validator hence locking many people out thereby creating economic imbalance within such systems
  • Exclusion Of smaller participants: More power will always go towards those with money therefore this may discourage smaller players from participating thus leading to concentration among a few big stakeholders
  • Dependency On Active Validators: The security of a POS Network depends on having enough honest actors who are willing to ensure that all transactions recorded within each block meet its requirements failure which malicious sets might easily compromise security.

The Bottom Line

Ultimately, the growth of blockchain can be regarded as a significant step forward with the emergence of proof-of-stake consensus methods. PoS offers energy-saving, flexible and secure agreement algorithms that open up new areas for creativity and wider adoption throughout different sectors. With more and more blockchains adopting PoS and finding uses for it, we are bound to witness some earth-shattering changes in our digital environment while also fueling further waves or phases of decentralized innovation.

FAQs

Is it possible to decentralize proof of stake systems?

Although evidence of stakes could cause centralization as a result of the concentration of stakes among rich participants, there are some ways that this can be countered such as through random selection procedure and slashing penalties among others. However, it is still not easy to achieve true decentralization in PoS.

Could you name a few disadvantages of proof-of-stake systems?

Some drawbacks of proof-of-stake systems include susceptibility towards centralization, long-range attacks or Sybil attacks vulnerabilities, nothing-at-stake problems, economic monopolies due to stake requirements and exclusionary nature against smaller players.

What does Ethereum 2.0’s proof-of-stake mechanism involve?

To secure the network while generating rewards for themselves, validators on Ethereum 2.0 use a new consensus algorithm known as Proof of Stake under which they operate beacon nodes that stake ETH. For one to qualify as a validator they need not have less than 32 Ether (ETH) and should assist in block validation plus ensuring agreement through finality mechanisms like Casper FFG.

What role do slashing penalties play in proof-of-stake systems?

To enhance security within these networks, validators are expected to follow certain rules which may lead to them being penalized by having some part of their assets deducted from the total number staked. This measure is meant to ensure honesty among validators thereby maintaining integrity within the network itself.

How does proof-of-stake affect the scalability of blockchain networks?

Compared with systems based on work done proofs, those relying more on ownership rights such as POS can greatly improve scalability in terms of speed transaction processing since less computation is required during validation leading also higher throughput across wider areas within shorter periods than would otherwise be possible.

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Whitney Anderson
Whitney Anderson
Whitney Anderson is a dynamic technology writer and content creator known for her quick learning and strong interpersonal skills. With a passion for community service and travel, she excels in crafting engaging tech content and leading diverse teams. Whitney is eager to bring her tech expertise and creativity to make a significant impact in your organization.

Why Trust Us

Our editorial policy emphasizes accuracy, relevance, and impartiality, with content crafted by experts and rigorously reviewed by seasoned editors for top-notch reporting and publishing standards.

Disclosure
Purchases via our affiliate links may earn us a commission at no extra cost to you, and by using this site, you agree to our terms and privacy policy.

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