What is Proof of Stake?

Welcome to Soldex Academy, your number one source for DeFi and crypto education. You probably know how the lottery system works. It’s a system of selling tickets and giving prizes to those people whose numbers are chosen randomly. The more tickets you buy, the more chances you have of winning. That’s similar to how the Proof of Stake works.

In this article, we will discuss the Proof of Stake consensus mechanism, how it works, and some of its pros and cons. Before we do that, ensure you watch our video on Proof of Work, which will help you better understand this video. Let’s get down to it.

By definition, Proof of Stake is a blockchain consensus mechanism that activates validators upon receipt of enough stake. In Proof of Work, miners must solve computational puzzles to validate transactions. But in Proof of Stake, validators are chosen randomly to validate blocks in the blockchain. Proof of Stake was first proposed in July 2011 on the Bitcoin talk forum as an alternative consensus mechanism for bitcoin.

How does Proof of Stake work?

The Proof of Stake algorithm randomly selects a node to be a validator. Instead of miners expanding energy and competing to solve puzzles, a node is randomly selected to validate the next block in Proof of Stake. In Proof of Stake, blocks are forged and not mined. Also, there are no miners in Proof of Stake, only validators. Validators are the participants in the network. They run nodes to add blocks on a Proof of Stake blockchain. To become a validator, you must lock an amount of the blockchain’s coins into the network as a stake. This stake must be locked for a certain time. When the algorithm selects a validator, the validator will verify transactions in a block and propose that the block be added to the blockchain. Other validators will then confirm that they’ve seen the block and that it is not fraudulent. This process of confirming blocks by other validators is called attestation. When sufficient attestations for a particular block have been collected, the block is added to the blockchain.

How are validators selected?

Different Proof of Stake blockchains have different sets of rules and methods for selecting validators. However, some commonly used methods for selecting validators are:

Amount of coins staked.

Coinage selection.

Randomization.

Amount of coins staked:

The larger the amount of coin staked, the higher your chance of being chosen as a validator. This is similar to our illustration in the intro; the more lottery tickets you own, the higher your chances of winning.

Coinage selection:

This selection process picks nodes based on how long they’ve been staking their tokens. The longer you’ve been staking your coins, the higher your chances of being chosen. The coinage is calculated by multiplying the number of coins staked by the number of days the coins have been staked. Once a validator forges a block, their coinage is reset to zero. This is to prevent large stake nodes from dominating the network. A selected node must wait a certain period of time before being selected again.

Randomized block selection:

Finally, the algorithm randomly selects validators by looking for nodes with the combination of the lowest hash value and the highest stake. When a validator is chosen, they confirm the validity of the transactions in a block, sign the block, and add it to the blockchain. Validators are rewarded for forging new blocks. However, unlike Proof of Work, no new coins are mined. Instead, validators in Proof of Stake are rewarded with transaction fees. Validators who participated in the attestation process are also rewarded with a small amount of the transaction fees. Some cryptocurrencies using Proof of Stake often start with Proof of Work mechanism and later adopt the Proof of Stake. Or they start by selling pre-mined coins. This is because no new coins are mined in the Proof of Stake mechanism. You may ask, what if a validator decides to sign a fraudulent transaction? What happens? Well, imagine you’re a major stakeholder in a company. You would never want to do anything that will jeopardize the future of the said company. If you do, you run a risk of losing your money and also gaining a bad reputation.

This same thing happens in Proof of Stake mechanism. Validators have already locked up a considerable amount of their coins. So they have a financial incentive to correctly verify the blocks and not try any fraudulent actions. If they go ahead with approving fraudulent transactions, people will lose faith in the coin, causing the coin’s value to drop. There’s little incentive to destroy the value of a currency you have a majority stake in. Validators have stronger incentives to keep the network secure and healthy. Also, if the network detects fraudulent transactions, the validator involved will lose a part or all of his stake. This process is called slashing. The validator may also lose his right to participate in the network.It is important to note that some Proof of Stake blockchains rewards validators who detect fraudulent transactions in a block during the attestation process. Also, validators who fail to detect these transactions may be penalized. To successfully take over the network and approve fraudulent transactions, you must possess more than 50 percent of the coin’s circulating supply. This is also known as the 51% attack. However, this is highly unlikely and very unproductive because it involves a whole lot of money. Also, it’ll force the value of the currency to drop. You’d end up spending a lot of money and achieving nothing. Now let’s go over the pros and cons of Proof of Stake

Pros of Proof of Stake

The three main pros of Proof of Stake are:

Energy efficiency

Decentralization

Security.

Energy Efficiency:

In Proof of Stake, there are no computational puzzles to be solved, so validators do not need to spend energy. This dramatically reduces the energy consumption of Proof of Stake.

Decentralization:

It is easier to run a node in the proof of stake system than Proof of Work. You don’t need to make huge investments in energy or hardware. Because it is cheaper to participate in staking, more individual validators increase decentralization. Also, the randomization method makes proof of stake more decentralized.

Security:

Because validators have a lot at stake in the network, they have strong incentives to keep the network secure and healthy. However, Proof of Stake has its cons too. The main disadvantage is it is still in its infancy. It has not been tested as much as Proof of Work. We’d get to know if Proof of Stake will actually scale and how secure it’ll be with time compared to Proof Work.