Proof-of-Stake (PoS) — What Is It?
Proof-of-Stake (PoS) is a consensus mechanism used by various cryptocurrencies to create and validate blocks of transactions.
It forms the basis of mining algorithms which allow blockchains to operate; using PoS, network participants are rewarded for validating transactions as legitimate.
PoS is a common consensus mechanism, and is used by popular cryptocurrencies including Ethereum (ETH), Cardano (ADA) and Solana (SOL).
How Does Proof-of-Stake Work?
Proof-of-Stake (PoS) runs in a different way to Proof-of-Work (PoW) blockchains such as that used in Bitcoin (BTC). The net result is the same, but how the network arrives at achieving valid blocks of transactions varies.
In PoS, nodes creating blocks, known as validators, are chosen according to how much of the blockchain asset they put up as collateral. Even then, this simply guarantees them the chance of being chosen; the actual selection is done at random, but more collateral equals a higher chance at being selected.
As such, PoS blockchains do not use a competitive method of block creation. Validators do not compete with each other in terms of hardware capabilities like in Bitcoin — so far the ultimate definition of “Proof-of-Work”.
Miners are thus replaced by validators, who nonetheless receive block rewards for confirming a block of transactions as correct.
Proof-of-Stake Security
Major PoS-based cryptocurrencies can be very difficult, if not impossible, for hackers to target. This is because established blockchain networks — much like Bitcoin — have become highly adept at singling out and removing threats to token value.
A key example is the so-called 51% attack. Here, a party with more than 50% of staked coins could theoretically alter the blockchain for their own ends, such as validating double spend transactions. Buying or otherwise controlling 50% of ETH tokens, however, would be extremely expensive, and given other validators’ ability to vote on blocks, still has a slim chance of success.
One problem inherent to PoS blockchains is the implications of a coordinated attack. Should a PoS blockchain end up being forked, validators can vote for both chains with minimal cost incurred, helping keep illegitimate activity alive.
Ethereum sought to remove the risk of such a scenario, which is known as “Nothing At Stake”, in its Casper upgrade. For more information on staking, read the TabTrader Academy article here.
Which Cryptocurrencies Use Proof-of-Stake?
Proof-of-Stake (PoS) is a very popular consensus mechanism thanks to the low energy and maintenance costs involved in executing it. PoS forms the backbone of some of the best-known crypto blockchains, among them Ethereum, Cardano and Solana.
It goes without saying that there are trade-offs to PoS, and Bitcoin supporters in particular argue that the “work” element in the oldest Proof-of-Work (PoW) coin sets it apart in terms of security.
Ethereum
Ethereum (ETH) is the largest cryptocurrency by market cap and as of 2023 is thus the biggest Proof-of-Stake (PoS) implementation in the cryptocurrency world.
It was not always like this, however — prior to 2022, Ethereum used a Proof-of-Work (PoW) consensus mechanism. Seeking efficiency and other benefits, it migrated to PoS in a process called the Merge. Ethereum developers claim that the Merge reduced blockchain network energy consumption by around 99.5%.
Ethereum now uses PoS, with prospective validators required to hold a minimum of 32 ETH in a “deposit contract.”
In classic style, validators are chosen at random to verify blocks, and as such, the frequency of blocks is fixed on Ethereum, as opposed to the variable block times seen on Bitcoin.
Solana
Solana (SOL), the tenth-largest cryptocurrency by market cap as of July 2023, uses a classic implementation of Proof-of-Stake (PoS) to validate blocks. Just as in Ethereum, Solana employs validators, and to become one, a user needs a minimum amount of staked SOL tokens.
The larger the stake, the more influence a validator has when it comes to voting for the legitimacy of blocks. Likewise, no staked SOL means no influence on the process at all.
However, a validator need not own the staked coins themselves; other participants can stake coins for their benefit, helping increase that validator’s voting power. Solana explains this setup as “proof” that such a validator is a trustworthy entity for block processing — a dubious validator would not attract large numbers of staked coins.
To find out more about Solana, check out the TabTrader Academy article on it here.
Cardano
Cardano (ADA), the seventh-largest cryptocurrency by market cap as of July 2023, also uses Proof-of-Stake (PoS). The basic components are the same as in Ethereum and Solana, but with emphasis on a different network composition.
Cardano is built on — and was the first crypto project to run — a PoS protocol called Ouroboros. This family of protocols can now be found elsewhere, with an adapted version in use by Polkadot (DOT).
Ouroboros uses so-called stake pools — a way of organizing and gathering staked coins to provide what developers call “reliable” validation nodes. Users can delegate — the term for staking one’s entire balance — to pools, which are run by a staking pool operator, rather than concern themselves with finding an appropriately trustworthy single validator.
Other Proof-of-Stake Crypto
These three blockchain networks are merely the tip of the iceberg for Proof-of-Stake (PoS). According to data monitoring resources, as of July 2023, there are nearly 300 PoS-based cryptocurrencies in operation.
Among the best-known of these are BNB (formerly known as Binance Coin), the in-house token of largest global cryptocurrency exchange Binance, as well as Polkadot, Tron, EOS, Tezos, Avalanche and Algorand.
In total, PoS coins contribute approximately 25% of the total crypto market cap at the time of writing.
Some of the tokens listed above use an evolved version of PoS called Delegated Proof-of-Stake (DPoS), an implementation which changes the way in which voting consensus is organized.
Advantages and Disadvantages of Proof-of-Stake
The debate around PoS versus PoW is one which has raged ever since the first PoS cryptocurrencies made their debut.
In essence, both protocols have their trade-offs, with PoW — and specifically Bitcoin — standing out in the security arena, while PoS offers flexibility not always available on PoW blockchains.
PoS networks have become extremely adept at on-chain transaction processing, offering near-instant finality for a tiny fee.
Advantages
The main plus of PoS, and one which is often hailed as a game-changing paradigm, concerns efficiency. The lack of need to compete for block rewards removes the need for ever-expanding processing capacity in PoS mining. This saves validators money, but also makes the network cheaper for all participants.
Transactions are faster, while PoS network transaction fees can also be extremely low, and while not always the case, PoS facilitates on-chain transactions which would otherwise be financially unviable.
With less energy required to run and the ability to give users faster and cheaper transactions, PoS blockchains are frequently touted as a solution to the “problems” traditionally associated with Bitcoin.
Disadvantages
PoS has become an extremely popular consensus mechanism in cryptocurrency, but it is not without its controversies. As with any nascent technology, PoS is far from foolproof when it comes to security, while other criticisms stem from the technology being inferior to Proof-of-Work (PoW) “by default”.
As mentioned above, the 51% attack risk is something which still plagues some lesser-used PoS blockchain networks, even if Ethereum and others have achieved a suitably high token price and sought to remove the risk of their own accord.
PoW advocates meanwhile argue that since Bitcoin has demonstrated its ability to withstand security threats over time, all while continuing to produce blocks, there is no reason to place a similar degree of trust in a lesser-proven alternative.
This scenario is static, as Bitcoin will always have a longer track record than any other cryptocurrency provided that the status quo with its own security remains the same.
PoS voting is also unpalatable to some, as the concept of trusting network participants creates what they consider unnecessary security risks.
Conclusion
Proof-of-Stake (PoS) has become entrenched in the cryptocurrency industry, and for good reason. It facilitates cheap and fast on-chain transactions, as well as the technical flexibility for blockchains to cater to specific use cases.
The low energy requirements of PoS-based blockchains have allowed many to launch and continue to survive the notoriously volatile cryptocurrency landscape over the past ten years.
While useful and even profitable, PoS faces its own set of security problems, some of which have not been decisively solved thanks to the nascent and still-evolving state of the technology.
The Proof-of-Work (PoW) consensus mechanism, notably that used in Bitcoin, forms the basis of an intense debate over the trade-offs between proven security and utility.
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FAQ
What does Proof-of-Stake mean?
Proof-of-Stake (PoS) refers to a way of achieving consensus among nodes in a blockchain when it comes to deciding whether a transaction or block of transactions is valid. Another method of doing this is Proof-of-Work (PoW), the mechanism used by Bitcoin.
What is the difference between PoS and PoW?
Proof-of-Stake (PoS) and Proof-of-Work (PoW) are essentially different ways of achieving the same result: valid blocks of transactions which have finality. In PoS, validators are chosen at random to confirm blocks as valid, and the likelihood of being selected depends on the amount of the blockchain’s native asset they stake. In PoW, validators are called miners, and they compete with each other for block rewards — hence the concept of their “work” being “proven”.
Is Ethereum PoS or PoW?
Ethereum, the largest altcoin by market cap, originally ran a PoW consensus mechanism. In 2022, this ended, and Ethereum migrated to PoS in a process known as the Merge.
