Oct 08, 2020
Table of Contents
In our article on Proof of Work, we mentioned that one of the three most widely used consensus algorithms is Proof of Stake. What is the PoS algorithm? Proof of Stake (PoS) was introduced as a more advanced consensus mechanism to replace the well-known Proof of Work. Both of these models are essential algorithms. In decentralized networks, consensus mechanisms are a method in which the network agrees on a single source of truth and relies on various autonomous authorities to cooperate in the maintenance of a system. They are necessary to confirm transactions that take place on the blockchain without the need for a third party. PoS increases the speed of the blockchain and comes with many improvements, such as reducing the amount of electrical waste, lower barriers to entry, and etc.
Proof of Stake (PoS) was first introduced by Sunny King and Scott Nadal in an article published in 2012. It aimed to solve the high energy consumption problem of Bitcoin mining. Peercoin was the first currency to use a PoS consensus model.
In Proof of Work, the miners solve cryptographically guessing puzzles by using their computational resources and consuming significant amounts of energy (electricity). Proof of Stake is an alternative kind of consensus mechanism and widely seen as a more environmental-friendly analog of the PoW consensus.
Instead of miners, in Proof of Stake, the nodes that produce blocks are called validators. The validators “stake” the cryptos by locking them into the blockchain to secure the network, produce and approve blocks. The decision on which node to validate a block is selected randomly. Regardless of whether the selection is random, the system gives a better chance of selections to nodes that meet a set of criteria. The two main criteria here are how many coins you have kept in the system and how long you have been holding them. But you must remember that staking more coins does not guarantee that you will be chosen as a validator, but it does provide greater opportunities.
After the random selection, the chosen node gets the right to validate transactions or create new blocks. Other nodes are no longer need to compete and spend computational effort to validate the same block. From that, we see how much energy consumption Proof-of-Stake prevents compared to proof-of-work mining.
In Proof-of-Stake consensus, validators awards are transaction fees. When the block is added, validators get a block reward directly based on proportion to their total stakes. This system encourages participants to validate the network based on a return on investment.
The most crucial theory that supports the credibility of the Proof of Stake consensus mechanism is that validators cannot risk losing their stakes. If the chosen validators act misbehaves or processes malicious transactions they will lose their stake. This gives incentive to the validator to keep the network secure by doing things right. That is why the model works so well.
Proof of Stake has many features that show it to be a better algorithm.
In recent years, PoS has gained significant value in the rapidly developing cryptocurrency space. Ethereum, the high-profile smart contracts platform, is currently in the process of transition from PoW consensus to PoS to better support the performance demands of the network. PoS also offers validators and network nodes greater ease in participating in consensus rather than PoW chains like Bitcoin.