What is the Proof-Of-Stake (PoS)? How is it different from Proof-of-Work (PoW)?
Proof-of-Stake (PoS) is a consensus protocol that locks cryptocurrencies to secure a network. It is less energy intensive than the Proof-of-Work mechanism invented by Bitcoin. That's not all, you'll find out how Proof-of-Stake works in this article.
Proof-of-Stake (PoS) Introduction
Proof-of-Stake is a consensus mechanism that secures a blockchain network. It ensures that only legitimate transactions are added to the blockchain. It works through validators locking their cryptocurrencies to secure the network. Cryptocurrency mining is a very energy consuming activity but there are new solutions that are being invented in favor of protecting the planet. The Ethereum community wants to change the way cryptocurrency is created in order to drastically reduce the carbon footprint of its blockchain. The method they are working on is called "Proof-of-Stake" (abbreviated "PoS").
Public blockchains, at their most basic level, are just databases. Most databases give permission to administrators to know who can access the databases and who can modify them. This centralized control is very convenient but makes them vulnerable to hacking in particular. Blockchains, on the other hand, make each user responsible for updating the data. This is why blockchains use consensus mechanisms, also called consensus algorithms. Consensus mechanisms ensure that the network functions properly by making sure that only legitimate transactions are added to the blocks. The nodes perform this verification together. A node is a computer that runs the software for a given blockchain. By doing so, it protects the system against attacks and in particular the famous 51% attack, i.e. the possibility for someone to obtain more than half of the total computing power of a distributed network in order to control the network at will.
To prevent attacks and problems that would allow funds to be spent twice, the problem of double spending, Bitcoin uses a "Proof-of-Work" consensus algorithm.
This system requires miners to use hardware and electricity to help the network process transactions. In Proof-of-Work, miners, or more precisely their computers, attempt to solve extremely difficult puzzles in order to be the first to complete a block of transactions. Their work verifies the legitimacy of the transactions as well as preserving a reliable history within the distributed ledger that is the blockchain. As compensation they receive cryptocurrencies, and in the case of the Bitcoin network, they receive bitcoins.
Proof-of-Work has been integrated into the Bitcoin concept and replicated by other cryptocurrencies including Ethereum. But one of the constraints of this system is that it requires a lot of electricity and hardware (especially machines) to secure transactions. Did you know: According to some researchers, the Bitcoin network alone currently consumes more electricity per year than the entire consumption of countries like Argentina or Poland. That's a lot of energy and that's why protocols like Ethereum have been working to design more energy-efficient consensuses.
Proof-of-Stake Ethereum 2.0
Ethereum developers are building a set of updates called Ethereum 2.0. This will operate on the Proof-of-Stake consensus and will eventually merge with the main Ethereum network.
Proof-of-Stake on Ethereum 2.0 aims to achieve the same result as Proof-of-Work. Proof-of-Stake securely verifies transactions on the blockchain. But while miners using Proof-of-Work dedicate crazy hardware resources like electricity and computing power to secure the network, validators using Proof-of-Stake dedicate their cryptocurrencies.
With Proof-of-Stake to have a chance of verifying the transactions in a block and thus collect a reward in the form of cryptocurrencies, validators must lock or "stake" at least 32 ETH that they cannot spend. The blockchain uses this locked cryptocurrency to secure the network. According to the Ethereum Foundation, Proof-of-Stake has several advantages over Proof-of-Work.
Proof-of-Work vs Proof-of-Stake
Since earning crypto rewards via Proof-of-Stake is not based on having the most computing power, you don't need super-powerful hardware. This gives the opportunity for more people to participate in the management of an Ethereum node which will allow for further decentralization and greater resistance to attacks, especially 51% attacks.
Due to the lower hardware requirements, Proof-of-Stake uses much less energy than Proof-of-Work.
Disadvantages of Proof-of-Work (PoW):
Requires very powerful equipment that is only owned by a minority of companies which favors centralization (e.g. Bitmain)
Huge energy costs
High transaction costs if the network starts to saturate
Disadvantages of Proof-of-Stake (PoS):
Less secure than proof-of-work
Early investors have a big advantage
Little use of tokens
How does the network choose the block validators?
Validators are randomly selected by the network to propose new blocks. They are also randomly grouped into committees of 128 nodes that change daily. Each time a new block of transactions is created and added to the blockchain database, the Proof-of-Stake consensus mechanism selects several committees to attest that the block that was proposed is correct. Validators receive rewards for both creating blocks and attesting to the creation of other blocks.
If validators are offline or do not attest correctly, then they receive a penalty called "slashing". If a validator tries to attack the network, he can lose his entire stake. The algorithm is designed in such a way that a person would lose more money attacking the network even if their attack was successful than using their resources to secure it. According to Consensys, there is less than a one in a billion chance that an attacker controlling one-third of the network's validators could control two-thirds of a committee's validators to pull off an attack.
Top projects using Proof-of-Stake (PoS)
Cardano: Cardano is a decentralized public blockchain and cryptocurrency project and is fully open source. Cardano is developing a smart contract platform that seeks to deliver more advanced features than any protocol previously developed. It is the first blockchain platform to evolve out of a scientific philosophy and a research-first driven approach. The development team consists of a large global collective of expert engineers and researchers.
Solana: Solana is a single-chain, delegated-Proof-of-Stake protocol whose focus is on delivering scalability without sacrificing decentralization or security.
Core to Solana’s scaling solution is a decentralized clock titled Proof-of-History (PoH), built to solve the problem of time in distributed networks where there is not a single, trusted, source of time. By using Verifiable Delay Functions, PoH allows each node to locally generate timestamps with SHA256 computations. This eliminates the need for the broadcasts of timestamps across the network, improving overall network efficiency.
Polkadot: Polkadot development is on track to deliver the most robust platform for security, scalability, and innovation. Currently, Polkadot is in the Governance and Removing Sudo phase of launch.
Ethereum is not the first cryptocurrency to use Proof-of-Stake. Algorand, Cardano, Cosmos, EOS, Polkadot & Tezos have all implemented some version of Proof-of-Stake. For the record, the Ethereum network is currently in the early stages of upgrading to Ethereum 2.0. Although people have been staking ETH on the network, it is not yet ready for use.
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