What is Proof of Stake?

Introduction

In the world of decentralized networks, though there isn’t any one single authority controlling the network, there is still a requirement for the controllers to take charge of the operations on the chain, and/or to validate the transactions. To solve this issue, the concept of a consensus mechanism was developed.

Technically, the consensus mechanism is the way by which the nodes - the computers on the blockchain validate the transactions happening on the chain. There are different types of consensus mechanisms available to be implemented on various such as Proof of Work, Proof of stake, etc. Here, we will be learning all about Proof of Stake

If you haven’t already, read our article about What are some popular consensus mechanisms?

About Proof of Stake and its Working

Proof of Stake is regarded as an updated version to validate transactions that came into existence to solve the disadvantages offered by Proof of Work. Developers on the network, especially the Ethereum network which is more than just about transactions, realized very early that it would be difficult to scale and sustain while using PoW. Hence, proof of stake was introduced.

In this mechanism, the miners, who are called validators here get a chance to stake their native cryptocurrency on the network and in return get a chance to win and validate a transaction. The validator is selected on the basis of

1. The amount of cryptocurrency staked
2. The duration of holding that currency

The network aims to reward validators who have been invested for a long.

All participating validators receive a reward in the native cryptocurrency, which is generally distributed by the network in proportion to each validator’s stake.

The minimum amount of crypto that validators are required to stake is often relatively high (for ETH2, for example, it’s 32 ETH) and validators can lose some of their stakes via a process called slashing if their node goes offline or if they validate a “bad” block of transactions.

List of networks using Proof of Stake

1. Ethereum 2.0
2. Cardano
3. Tezos

Advantages of Proof of Stake

1. One of the biggest advantages of this consensus mechanism is its energy efficiency. To validate a transaction, unlinked PoW, not every miner need to be engaged and hence saving upon the energy consumption.
2. As the mechanism’s only requirement is to stake the currency, it doesn’t require having any expensive high-end computing devices.
3. PoS as a mechanism offers fast transaction speed and hence offers the option of scalability on the network.

Disadvantages of Proof of Stake

1. As the concept is new, a lot of developers doubt the security and safety of the transactions being processed on the network.
2. As it requires staking cryptocurrency on the network, the validators who have a lot of currency already are always at an advantage over others.
3. The staking process requires the currency to be locked in for a minimum amount of time and hence the validators lose based on the opportunity cost of using the currency.