What is Proof of Stake? How it Differs From Proof of Work

[ad_1]

In brief

Proof of stake is a consensus mechanism, which makes sure that only legitimate transactions get added to blocks.
It works by having validators lock up their cryptocurrency to secure the network.

Mining cryptocurrency such as Bitcoin is an energy-intensive business. But it doesn’t have to be.

Bitcoin, and other cryptocurrencies such as Dogecoin and Litecoin, secure their networks using the proof-of-work (PoW) consensus mechanism.

An alternative consensus mechanism used by cryptocurrencies such as Ethereum is called proof-of-stake (PoS), which radically reduces the blockchain’s carbon footprint.

In this article we’ll explore what consensus mechanisms are, and how proof-of-stake differs from proof-of-work.

What is a consensus mechanism?

Public blockchains, at their most basic level, are just databases.

Most databases set permissions for who can access and edit them. This centralized control is convenient, but makes them vulnerable to hacks. By contrast, blockchains make everyone running the software—from exchanges to traders in their basement—responsible for updating them.

That’s a potentially messy process, which is why blockchains use “consensus mechanisms” or “consensus algorithms.” Consensus mechanisms keep the network humming, making sure that only legitimate transactions get added to blocks. It’s all the nodes—or computers running the blockchain software—checking amongst themselves to conclude, “Yes, this is true.”

In doing so, they guard against “51% attacks,” which is when someone accumulates more than half of the computing power in a distributed network and can then control it.

What is proof-of-work?

To prevent attacks, which make it possible to spend funds twice, Bitcoin uses the proof-of-work consensus algorithm. That system asks people to use hardware (and electricity) to help the network process transactions. In proof-of-work, miners (or, their computers, to be precise) try to solve fiendishly difficult puzzles in order to be the first to complete a block of transactions. Their work helps to verify that the transactions are legitimate. As compensation, they’re rewarded with cryptocurrency such as Bitcoin.

Proof of work was built into the design of Bitcoin, and replicated by other cryptocurrencies, including Ethereum. However, one of the by-products of this system is it requires a lot of machines using a lot of electricity to solve complex problems, the vast majority of it rendered moot except for the energy expended by the winning miner.

What is proof-of-stake?

Proof-of-stake aims to achieve the same outcome as proof of work: to securely verify transactions on the blockchain.

Whereas PoW miners dedicate hardware resources (large, expensive computers) to secure the network, PoS “validators” dedicate their cryptocurrency. With PoS, to get a chance to verify transactions in a block—and to get the associated fees—validators must lock up, or stake, cryptocurrency that they can’t spend. The blockchain uses that locked-up crypto to secure the network.

According to the Ethereum Foundation, proof of stake has several advantages over proof of work.

🖥️ Since earning rewards isn’t based on having the most computing power, you don’t need super-fancy hardware.
🔌 Because of the lower hardware requirements, proof of stake uses far less energy than proof-of-work.
👨‍💻 More people can participate in running a PoS node, which will allow for further decentralization and more resistance to 51% attacks.

Since the “merge” in September 2022, Ethereum has switched from a proof-of-work consensus mechanism to a proof-of-stake one.

Did you know?

In order to become an Ethereum validator, you must stake 32 ETH.

How does the network choose?

Validators on a proof-of-stake network such as Ethereum are chosen at random by the network to propose new blocks.

They are also randomly grouped into committees of nodes, which change daily. Every time a new block of transactions is created and added to the blockchain database, the PoS consensus mechanism selects multiple committees to “attest” that the block that’s been proposed is correct.

Validators receive rewards for both making blocks and attesting to other blocks being made. If validators are offline or not making correct attestations, they receive a penalty. If they try to attack the network, they can lose their entire stake.

The algorithm is designed to make an attack on the network statistically improbable. According to ConsenSys (which is an investor in an editorially independent Decrypt), “There is less than a 1-in-a-trillion chance that an attacker controlling 1/3 of the validators on the network would control ⅔ of the validators in a committee to successfully execute an attack.”

The future of proof-of-stake

Ethereum isn’t the first cryptocurrency to use proof of stake.

Algorand, Cardano, Cosmos, EOS, Polkadot, and Tezos have all implemented a version of proof of stake.

Since Ethereum switched to proof-of-stake, the amount of staked ETH has steadily increased; as of January 2024, it stands at over 29 million, almost a quarter of the total supply, per Dune Analytics.

Some have raised concerns that proof-of-stake could lead to the centralization of blockchain networks, while staking has emerged as a regulatory flashpoint in the U.S., with the Securities and Exchange Commission alleging that staking services offered by crypto exchanges constitute unregistered securities offerings.

Meanwhile, environmental campaign groups such as Greenpeace have pushed for Bitcoin to switch to proof-of-stake. However, it’s unlikely that the Bitcoin network would ever do so, given its ideological attachment to proof-of-work as a tool of decentralization. To date, the community of Bitcoin miners and developers has rejected any proposed changes to the system designed by Satoshi Nakamoto.