What Is Proof-of-Stake (PoS)?

By Kirsty Moreland

Consensus mechanisms, Validators, Public Key Cryptography. While all of these terms may seem confusing, it’s important to know what these terms mean and how they affect you when you hold cryptocurrencies. Understanding the core of how the blockchain works will help you make the right decisions, and so, it’s extremely important to know about consensus mechanisms. In short, a consensus mechanism is what keeps the blockchain you know and love secure.

However, changing a consensus mechanism also alters the features of a blockchain entirely. For example, those that are more scalable tend to be less secure or decentralized. This is a concept called the blockchain trilemma. While proof-of-work offered the first-ever public blockchain consensus mechanism, it didn’t exactly fit the purposes some crypto enthusiasts were finding for it. Put simply, Bitcoin on its proof-of-work consensus was too slow and inefficient for blockchain apps and games.

As a result, crypto enthusiasts looked for alternatives. The only mentionable content to the Proof of Work consensus was proof-of-stake. In short, it aimed to mirror all the decentralization of the Bitcoin network without massively impeding its security, and many today would say it achieved that feat.

But before we get there, let’s go back to basics. In fact, what is Proof-of-Stake exactly?

What Is Proof-of-Stake (PoS)?

Proof-of-stake (PoS) is a consensus mechanism for blockchain networks that uses randomly selected validators to produce and approve blocks rather than miners. These validators “stake” the native network’s tokens by locking them into the blockchain. In return, they receive rewards based on their total stake, incentivizing nodes to validate the network based on a return on investment (ROI). Put simply, PoS is largely viewed as the greener, and more scalable version of Proof of Work (PoW) consensus in Bitcoin.

How Does Proof-of-Stake Work?

In Proof of Stake blockchains, validators are selected to produce the next block based on their stake. To explain, to become a validator on a proof-of-stake blockchain, you must “stake” an amount of the corresponding coin. For example, validators on the ETH network must stake 32ETH in order to validate transactions. This stake acts as collateral, ensuring the validator behaves honestly. If they don’t behave well, their stake is “slashed”. To explain, crypto slashing is a proof-of-stake blockchain’s form of punishment for acting maliciously or producing fake blocks.

Usually, the more validator stakes, the more trustworthy they are for the system. Thus, although often designed with random functions to prevent a front-running consensus, these types of validators have a higher chance of producing the next block. Proposed blocks by validators are then propagated to the rest of the set, who verify and add the approved block to the blockchain. 

Types of Proof-of-Stake

Delegated Proof-of-Stake (DPOS)

Delegated Proof of Stake is a blockchain consensus mechanism where network users vote and elect delegates to validate the next block. Like a traditional proof-of-stake mechanism, DPoS uses a collateral staking system. However, it also uses a specific democratic process that aims to make the transaction process more fair. 

Nominated Proof-of-Stake (NPOS)

Nominated Proof-of-Stake is a variation of the original Proof of Stake mechanism first created for the Polkadot network. NPoS works similarly to its parent mechanism, however it also allows token holders to nominate validators to represent them in the block validation process. Only nominated validators can participate in block formation, and each individual nominator can nominate up to a certain number of validators, a total of 16 for the Polkadot network.

This is similar to the delegated Proof-of-Stake (DPoS) mechanism in that the network delegates voting power to a third party. However, while DPoS networks use a weighting mechanism to decide power, NPoS networks automatically distribute the stake amongst participating validators evenly. This means both validators and nominators can be punished by the network for malicious activities. Leading to a more balanced share of power between validators and nominators.

Liquid Proof of Stake (LPOS)

Liquid Proof of Stake is a mechanism created specifically for the Tezos network. It works much like traditional proof-of-stake mechanisms, apart from the validators on these networks are called “bakers”, and instead of “staking” their XTZ, they “bake” it. However, while most proof-of-stake networks use a lock-up period for their staked coins, Tezos does not. In short, you can unstake your XTZ at any time.

Crypto Staking: How Does it Work?

Proof-of-Stake blockchains means staking. And staking means rewards. The rules depend on the blockchain you’re using, but there are a few main options.

Native Staking

This involves locking up a significant amount of money and then running the programs required for validating transactions. However, this is usually too high a price for most people to consider. However, if you have the cash you can stake directly via the Ledger validator node for yourself.

Pooled Staking

Many platforms let you earn staking rewards simply by locking up your coins in your existing crypto wallet. It’s important to note that this type of service is also offered on custodial wallets or exchange wallets. These services will essentially validate transactions using your funds as collateral, and then pay you a portion of the rewards. Another name for this is pooled staking. However, make sure that you do your due diligence before using a custodial pooled staking service. That’s because, without the custody of the private key that controls that account, you don’t have true ownership of the funds stored there. That means the platform can change your portion of the rewards at any time.

Fund a Validator

Aside from pooled staking, there are other ways to get involved with staking without doing the whole job yourself. For example, you could also fund a validator. Doing so means someone else will handle the technical details, and make up the rest of their stake elsewhere. This can sometimes be more lucrative, as you will share the rewards with fewer people. However, by funding a validator, you have no idea how nobly they will act. If the validator you fund is malicious and their stake is slashed, your reward goes along with it.

Save Yourself The Trouble And Stake Via Ledger Live

Whichever way you decide to stake, make sure to check out the full article on crypto staking, plus, look at your options within Ledger Live. In the Ledger Live Discover tab, you can find a range of staking providers that can help you start staking from the security of the Ledger Live software. This way, you can rest assured your private key, the one protected by your Ledger device, is safe, while interacting with a range of staking options such as pooled staking, liquid staking or funding a validator.

Proof-Of-Work Vs Proof-Of-Stake: What’s the Difference?

Firstly, the Proof-of-Stake consensus bypasses the computational lottery-like process of Proof of Work. Instead, it chooses validators (rather than miners) based on their stake. This means that those with the most confidence in the system validate the most transactions and therefore receive the most rewards. This is opposed to proof-of-stake miners, who must solve incredibly complex transactions with specialized equipment.

Secondly, PoS has a “fast-finality” consensus design and is more performant both in terms of on-chain transactions per second (TPS) and the actual settlement of network transfers.  This means proof-of-stake blockchains can keep up with a lot more transactions per second, which is imperative for blockchain games and similar apps and platforms.

Finally, it is a much less energy-consumptive method than a Proof of Work consensus. Although Bitcoin is often mined using renewable and green energy, Proof-of-stake networks consume almost 90% less energy than their proof-of-work counterparts. This means these types of blockchains are much more effective for everyday use in apps or games. Plus, it also means you don’t need any specialist equipment to validate transactions.

Drawbacks of Proof-of-Stake (PoS)

Despite its strengths, Proof-of-Stake – like any technology – is not without its limitations.

More Centralized than Proof-of-Work

As a system that favours validators with the largest stake, Proof-of-Stake networks will tend toward centralization. With no upper limit on how much one validator can stake, this can lead to significant power being concentrated in the hands of a few very large validators. This makes for a network that is less resistant to potential 51% attacks by validator nodes.

Not Battle Tested

At the time of writing, although Proof-of-Stake has been successfully used by multiple blockchains, it has never been battle tested to the same scale as Proof-of-Work. Bitcoin and other PoW networks have secured more than $1Trillion – a figure far greater than that stored by current Proof-of-Stake blockchains. With a greater tendency toward centralization, Proof-of-Stake’s capacity to maintain security at this scale is a question worth paying attention to for users and developers alike, and will only be known over time.

Top Blockchains That Use Proof-of-Stake (PoS)

Proof of Stake networks open up the door for users wanting to accrue awards. Put simply, there’s no crypto staking without Proof-of-Stake. So, before you dive into the technicalities, let’s explore some of the most popular networks for staking. But don’t think that this list is the end of the story. You can also find countless proof-of-stake networks today, such as DASH, NEO or Cardano (ADA).

Ethereum (ETH)

While Ethereum was once a proof-of-work blockchain, the Ethereum proof-of-stake network is now in full swing. In fact, withdrawing your stake is now possible since the Shanghai upgrade. Not only did this transition reduce its energy consumption by 90% since then. Proof-of-Stake also brought faster transaction speeds and better scalability to the network.

Since the transition, new opportunities have arisen for staking ETH. As explained, this supports the security of a proof-of-stake blockchain. To do just that, you have a few options. However, should you choose native staking, bear in mind that validators on the ETH network must stake 32ETH to get going!

If that’s not an option, don’t worry – you can also join a staking pool, such as Lido. This means staking a smaller amount of ETH 2.0 to a larger equity pool (in exchange for a small fee), which then issues rewards proportionate to your original stake.

Tezos (XTZ)

The Tezos blockchain is widely known for having one of the biggest ICOs of all time, with nearly $232 million invested in XTZ tokens. Tezos is a multi-purpose blockchain using proof-of-stake. Specifically, Tezos uses its own version of a PoS consensus called liquid Proof of Stake.

To explain, token holders can delegate their accounts to other token holders called validators without transferring ownership of their assets. These validators will then be in charge of securing the network on their behalf. The user may then earn the rewards generated minus the validator’s fees.

When delegating, your XTZ remains completely liquid. You are free to move your tokens anytime, as there are no freezing periods when delegating to a validator. Furthermore, there are no direct risks of delegating XTZ. Choosing your validator carefully is enough to easily ensure quality of service and rewards.

If you want to know more about staking Tezos directly with Ledger Live click here.

Tron (TRX)

Tron achieves a high rate of transactions per second (TPS) through a Delegated Proof of Stake mechanism. 

In the Tron network, there are 27 validators that create the blocks on its blockchain. These are called Super Representatives (SR). Everyone participating in the Tron network can use their TRX to vote on who should be a Super Representative. To become a Super Representative, you’d need to have the highest amount of votes. Next, the Super Representative who creates the block gets to choose who to reward. And of course, rewards come in the form of the network coin, TRX.

If you want to know more about staking Tron directly with Ledger Live click here.

Cosmos (ATOM)

Cosmos is a rather unique blockchain, powered by its native cryptocurrency known as ATOM.

The Cosmos ecosystem sets itself as an all-in-one solution to solve scalability and interoperability issues that the blockchain industry has been trying to address. It aims to do so using a hybrid Proof-of-Stake mechanism relying on validators. To explain, on the cosmos network, holding ATOM allows you to vote on who should become a validator. All holders must do is delegate their assets, and in return, they receive rewards. However, it’s important to note that delegating ATOM means locking it up. That said, once you delegate your stake, you can claim your rewards at any time. If you want to know more about staking Cosmos directly with Ledger Live click here.

Algorand (ALGO)

Algorand aims to solve the three main challenges faced by blockchains today: security, scalability, and decentralization. In Algorand’s consensus algorithm, called Pure Proof of Stake, the network ties its security to the honesty of the majority.

Many Proof-of-Stake chains force you to either become a validator for the network or delegate your cryptocurrencies. This isn’t the case with Algorand. With ALGO, you just need to hold at the very least 1 ALGO on your address and you will automatically start accumulating rewards. That’s it!

If you want to know more about staking Algorand directly with Ledger Live click here.

Polkadot (DOT)

Polkadot is a next-generation blockchain protocol that focuses on supporting multiple chains within a single network. It actually created its own version of the Proof of Stake (POS) consensus, Nominated Proof of Stake (NPOS), the utility of which spread much further than just the Polkadot network.

The multi-chain protocol is designed to return control to individuals. Put simply, Polkadot is the most interoperable blockchain network yet, aiming to support rather than compete with them.

Polkadot is the latest entrant in the blockchain space, seeking to grow the ecosystem with additional solutions beyond networks like Ethereum and Cosmos. However, Polkadot is designed to coexist and interoperate with other blockchain networks rather than competing with them.

If you want to know more about staking Dot directly with Ledger Live click here.

The Future of Proof-of-Stake

Overall, PoS is still one of the most important innovations in the public blockchain sphere. But it’s not just the innovation itself; it’s also led to plenty of other progressive steps forward. For example, Proof-of-Stake has also built the foundations for new consensus mechanisms such as nominated and delegated proof-of-stake.

Put simply, the PoS consensus offers the answer to those looking to build upon the security of proof-of-work in a more scalable and energy-efficient way. While Proof-of-Stake is not yet as secure as Proof-of-Work, it has its undisputable advantages for quick transactions and blockchain apps. To explain, proof-of-work blockchains can support more applications. They can handle more transactions in a certain period. And Web3 is still growing, more innovations crop up each day. Proof-of-Stake is unlikely to be the last consensus mechanism you ever hear about.

Knowledge is Power.

Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block episode Cryptocurrency Explained