Proof of Stake (or PoS) is a consensus mechanism used in a blockchain network. By consensus mechanism, we imply it as a mechanism for validating entries of a distributed database, a.k.a, blockchain. So, we can conclude that a consensus mechanism secures the blockchain.
Proof of stake has a term called ‘stake’ mentioned in it. Stake, here, is defined as the value/money user bets, on a certain outcome.
In PoS, network nodes who want to participate in the network must lock a certain amount of the network’s native token (or cryptocurrency) into the system, as their stake. The size of this stake generally determines the chances for a particular node (or user) to be selected as the next validator in the system to create the next block.
Before PoS, the most popular way to achieve distributed consensus was through Proof of work (also called as PoW & was implemented in Bitcoin). But PoW proved to be quite an energy-intensive mechanism (i.e. the amount of electrical energy required in mining crypto was very high). So, a proof of work based consensus mechanism increased a node (or users) chances of mining a new block if it had more computation resources available to them than others.
Unlike Proof of Work (or PoW), PoS systems also do not require high amounts of computational power. This is why they are claimed as more energy-efficient, affordable, and open to participation for a larger number of users worldwide. Further, as the new crypto is not usually created to reward miners, the price of the coin also remains more stable.
Advantages of a PoS mechanism
- Defined Value ROI:
In PoW, miners receive block rewards of freshly-minted crypto. Whereas, in PoS, nodes receive transaction fees of pre-mined crypto in exchange, which makes it more favorable.
The stake discourages nodes from validating or creating fraudulent transactions on the network. This further ensures the security and safety of the nodes. If the network detects any fraudulent transaction, the node responsible will lose a part of its stake and its right to participate in the ongoing cycles.
As there’s no competition among the nodes to attach a new block, energy is saved. Also, no problem has to be solved (like in the case of the Proof of Work mechanism), thus saving the energy needed to perform operations.
Weakness of a PoS mechanism
- Large stake validators:
If a group of validator candidates combines and own a significant share of total cryptocurrency, their chances of becoming validators will increase by manifold. In PoS, increased chances lead to increased selections, which lead to more and more forging reward earnings. This can lead to owning a huge currency share in the network, which further can result in biases. This can cause the network to become centralized over time, if not managed well.
- ‘Nothing at Stake’ problem:
This problem arises when the nodes (or users) support multiple blockchains in the event of blockchain forking. In the worst-case scenario, every fork will lead to multiple blockchains and validators will have to work in order to reach a consensus. And the nodes in the network will never achieve it due to discrepancies.
- New technology:
Now, it’s not a hidden fact that PoS is still relatively new. Research is ongoing to find flaws, fix them, and make it more viable and efficient for a live network with actual currency transactions. But still, we are a long way from that ideal vision.
Examples of PoS
Blockchains like Cardano, Solana, Algorand, and Ethereum 2.0 (launching soon) are a few examples that use the PoS consensus mechanism.