What is proof of stake? Which cryptocurrencies use PoS? How does PoS work? What are the pros and cons of PoS? Is PoS the best of all blockchain consensus mechanisms?
There are various consensus mechanisms out there in the blockchain network. All of these serve as the security gates for networks and prevent them from threats. In this article, I will try to explain one of these consensus mechanisms, i.e., proof-of-stake.
So, let's start understanding it from a beginner's perspective.
Let me first explain what a consensus is. For every plan that is carried out by a group to achieve a single goal, there needs an accord among all the individuals so that the plan goes in favor of the majority of them. Every individual should be taking part in the decision-making process or at least agree to the decisions made.
While it is quite simple in the real world where the number of individuals participating is low, it becomes very hard to reach a common agreement when the number of individuals becomes very large.
As you can see how difficult is it to reach such a decision when a large number of people is there. Can you imagine how much difficult is it in a blockchain world? If you do not know what a blockchain is, read the below section or skip it in case you know it well.
Blockchain is an electronic distributed ledger that keeps the record of all the activities happening on the network, the activity may be a transaction, a message, a development, or anything. While the record can be publicly accessed, it cannot be manipulated by a single entity because it is run by a number of individuals or nodes. For any change to take place, there needs a consensus among all the individuals running the network.
So, now we have understood what consensus is. A consensus mechanism, as expressed by the word itself, is a mechanism that tries to develop an agreement for a particular task among the working entities.
What Is Proof-of-Stake?
It is a type of consensus mechanism or algorithm in blockchain technology that works on the phenomenon of staking cryptocurrencies. For a node to validate a transaction on such a blockchain that uses a PoS consensus mechanism, it needs to stake its tokens on the network. A large number of nodes stake their coins and a random node is selected from those who stake the highest amount of tokens.
The randomly selected node, in this case, is known as the validator. The validator signs the new block in the chain and then this block is attested by the majority of the member nodes of the network.
It was first introduced in 2011 and now, various cryptocurrencies such as Algorand, Cardano, and Solana use this algorithm to achieve consensus among the nodes. Ethereum, which currently uses proof-of-work, is now transforming its algorithm to proof-of-stake.
How Does Proof-of-Stake Work?
Let's understand the working of proof-of-stake in simple words.
There are a number of nodes that run the blockchain in proof-of-stake. For any transaction to happen on a decentralized electronic ledger of blockchain, there needs a consensus among all the nodes participating in the maintenance of the ledger. To achieve this state of consensus, we need to take the permission of all or majority of the nodes for the transaction.
All of them cannot simultaneously add a new block to the ledger. The proof-of-stake algorithm helps solve this problem.
All the nodes need to lock or stake a minimum amount of tokens of that cryptocurrency to be eligible to mint a new block. This minimum amount differs from one blockchain to another. Among those who run verified nodes and stakes the minimum amount of cryptocurrencies, one is selected randomly. The randomly selected node is not always the same.
The randomly selected node then signs the block. Once the block is signed, it goes to all the nodes who verify it. The verified block is known as the attested one. The block must be attested by the majority of all the nodes.
When the block is attested by the majority of the nodes, the transaction gets completed. This is how the proof-of-stake consensus algorithm works and how an accord is signed among all of its nodes.
The Advantages of Proof-of-Stake
As for double-spending, one needs to acquire the support of the majority of all the nodes, it is one of the most efficient methods to prevent the double-spending of cryptocurrencies. PoS eliminates theft and other malicious activities on the blockchain network.
Unlike the proof-of-work algorithm which uses a lot of energy for solving a difficult mathematical problem and harms the environment, proof-of-stake is quite safe for the environment. A node does not require much computing power to prove its right to add a new block to the blockchain. So, it proves to be a safer alternative to other energy-intensive algorithms and therefore is more eco-friendly and less costly.
As the nodes do not need to spend more on solving a difficult mathematical problem, the transactions get completed within no time and therefore the transaction fees are reduced and the speed is increased.
The Disadvantages of Proof-of-Stake
While it is one of the most efficient methods for achieving consensus among the participating nodes, We cannot ignore the dark side of PoS. Let's discuss the major disadvantages of PoS.
What are cryptocurrencies made for? Obviously, for spending but the PoS prevents us from doing this. As only those who stake the more than anyone else on the network receive the chance to mint a new block, there is always a tendency for cryptocurrencies to be hoarded rather than traded. More cryptocurrencies will be stored and less will be used for spending.
The one having the highest stake gets the chance to create a block, this is more of like money power where the power is given to the wealthiest. This will obviously lead to the centralization of the power instead of decentralizing it.
Wrapping Up
Though there are various merits and demerits of the proof-of-stake, it is one of the most effective methods of achieving a state of consensus among the contributing nodes. While the number of cryptocurrencies using proof-of-work is more than that of those using proof-of-stake, many major cryptocurrencies are transforming themselves into the proof-of-stake mechanism.
The disadvantages of PoS make it more susceptible to modification into a new one. So, developers are continuously trying to get more out of consensus mechanisms.
Now, it's time to hear from you. What do you think of PoS? Is it better than PoW? Is there any better alternative to this algorithm available? Let me know in the comment section.
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