What is Proof-of-Stake?
|– Staking is the action of locking crypto assets to secure the network, and being paid interest for doing so.|
– Proof-of-stake is a consensus algorithm that decides on who validate the next block, according to how many coins you hold, instead of miners cracking cryptographic puzzles using computing power to verify transactions like they do with traditional Proof-of-Work.
– Proof-of-stake has widespread support among many industry experts, and should allow better sustainability .
The concept of PoS
Proof-of-stake (PoS) is a consensus algorithm for blockchain networks that is based on a randomly selected state of validators who “stake” the native network tokens by locking them into the blockchain to produce and approve blocks. Validators are rewarded directly corresponding to their total stake, incentivizing nodes to validate the network based on a return on investment (ROI).
Peercoin was the first cryptocurrency to implement a full-scale PoS consensus model, and PoS is largely viewed as the greener, and a more scalable analog of PoW consensus in Bitcoin which requires significant energy expenditure.
In PoS blockchains, validators are selected to produce the next block based on their stake. Although often designed with random functions to prevent front-running consensus, a larger amount staked by a validator gives them a higher chance of producing the next block. Proposed blocks by validators are then propagated to the rest of the set, which verifies and append the approved block to the blockchain.
Benefits for the network
There are several intriguing components of the PoS design. Notably, since incentives are financially driven via rewards in the native token, PoS bypasses the computational lottery-like process of PoW, removing the expenditure of energy to reach consensus in the process. This has several important consequences for performance and security.
Concerning performance, PoS has a “fast-finality” consensus design where block production can converge on consensus among the validators and network nodes occur at a much more rapid pace than its PoW counterpart. As a result, PoS networks are more performant in terms of on-chain transactions per second (TPS) and the actual settlement of network transfers.
Concerning security, validators are incentivized to act honestly in producing blocks and approving transactions because of two primary reasons.
First, validators likely control sizeable portions of the network token, even the ones not locked into the network, which financially incentivizes them to secure the chain otherwise face a dilemma where security vulnerabilities negatively affect the token’s price. Second, the lock-in mechanism of a stake that validators producing blocks are required to adhere to is under threat of being “slashed” or removed from their control should they choose to act maliciously and produce false blocks or manipulate transactions. Note that this slashing mechanism is not always embedded in the blockchain protocol.
Benefits for crypto owners
Crypto owners, who are not interested in being a validator themselves, can also be rewarded for participating in the network ecosystem.
Different ways to generate revenue by staking are available today. The rules depend on the blockchain you are using. Make sure to learn more about each protocol before participating.
- Reward for holding – Users can earn rewards by only keeping their coin in their wallet for a given period of time. No specific action for staking those coins is necessary. The reward will depend on the number of coins kepts on their wallet and (often) the number of time they are kept. The action of claiming such reward may be either automatically enforced by the protocol, or consequent to a user’s action.
- Reward for participating / delegating – Users delegate part of their stake to a validator who will be in charge of securing the network. The reward will come from the validator sharing part of its revenue with those delegating their stake to him.
Those reward can be either automatically enforced by the protocol, or depending on the good will of the validator.
The cons of PoS
Conversely, the game theory design around PoS consensus is significantly more complicated than PoW because it needs to take into account a whole new set of incentive pathways. Critics point to several vulnerabilities, such as long-range attacks, as downstream consequences of the complicated nature of PoS. Additionally, PoS is based on staking that corresponds to financial holdings, which means large token holders have better ROI and the rich get richer. Similarly, the snowballing ROI of large token holders threatens the network’s decentralized validation process, putting more power in the hands of wealthy validators.
POS, to become the new standard?
PoS consensus has risen in prevalence significantly over the last several years among public blockchains looking to improve Bitcoin’s underlying performance execution. Such blockchains can support more applications and transactions in a period, and innovative takes on PoS, such as bonded PoS, delegated PoS, and others have emerged to meet specific network demands.
Ethereum, the high-profile smart contracts platform, is currently in the process of transitioning from PoW consensus to PoS to better supplement the network’s performance demands. Other networks, like Cosmos, an interoperable blockchain network, is live and one of the first full-scale PoS implementations to go live in the industry.
PoS also gives validators and network node operators a greater opportunity to participate in consensus compared to PoW chains like Bitcoin. The low barrier to entry, which requires holding a specific number of tokens, is appealing to users who do not wish to sink costs into expensive ASIC hardware for Bitcoin mining.
Overall, PoS has been gaining significant momentum in the rapidly evolving cryptocurrency space. Its long-term sustainability among public blockchains is still yet to be proven, but it has widespread support among many industry experts, participants, and observers. PoS also has collateral effects on on-chain governance systems in cryptocurrencies and blockchains, which you can find more about here.