What is Proof Of Stake?

May 22

Do check the Blockchain & Bitcoin explainer before reading this for a better understanding of Proof Of Stake.

TL DR

Proof Of Stake is a consensus mechanism used by a blockchain to agree upon the data records. It ensures the blockchain is secured and maintains its integrity.

It is an alternative to the famous Proof of Work mechanism used in Bitcoin and Ethereum.

How does it work?

In Proof of Stake, validating a transaction is done by participants using computers known as nodes. The nodes process the transactions and create new blocks in the blockchain.

The participants who are eligible to process the transactions are known as validators.

Any node can be selected as a validator. To get a chance to become a validator, the participants stake their tokens. Think of it as the owners of the tokens are using it as collateral to get the opportunity.

The blocks are validated by multiple validators. Once a block is verified to be correct by a minimum number of validators, it is added to the blockchain.

But why would anyone become a validator? What is in it for them?

Validators earn rewards for processing the transactions. If the block is valid, they get rewards from the collected transaction fees.

How do nodes get selected to validate?

Anyone can be a validator. But the selection is not random. There are multiple factors taken into consideration while selecting a validator.

One of the main deciding factors is the amount of the blockchain’s native token the participants have staked in the pool.

Another factor is the time since they have staked it.

So the most invested ones in terms of the amount and time get the chance to be a validator.

Though anyone can be a validator, it requires some upfront capital. The upfront capital needed to be a validator is different for different blockchain.

For Ethereum 2.0 the required amount is 32 ETH.

But is the mechanism trustworthy?

Validators are penalized to prevent any bad actor from manipulating. They lose their staked amount if they validate a bad block. This is known as slashing.

They can also lose a portion of the stake if their node goes offline and they are not able to validate.

The staked amount disincentivizes validators from cheating.

What are the benefits of Proof of Stake?

Proof of Stake has lesser energy consumption than Proof of Work. It uses a fraction of energy compared to Proof of Work.

In Proof of Work, there is a race among the nodes to validate the transactions.

But in Proof of Stake, a few chosen nodes validate the transaction.

There is no duplication of efforts. Each of the nodes does not go after the same block. Instead, the few chosen validators get to do the confirmation.

Proof of Stake solves another problem. It prevents the centralization of miners. In Proof of Work mechanisms, only those who can buy the capital-intensive hardware and pay for the energy consumed get to participate. The ability to validate in a PoW consensus mechanism is concentrated among a few miners.

With Proof of stake the barrier to entry is significantly reduced.

The investment needed is much lower than Proof of Work. You don't need expensive hardware or pay high energy bills to participate in the process.

If you do not have enough tokens to stake, you can avail the benefits of staking pools. There are staking pools that let anyone participate even with a small number of tokens.

The Future

Compared to Proof of Work, Proof of Stake is new. Proof of Stake is growing rapidly owing to its benefits over Proof of Work.

Well known chains such as Ethereum are working towards moving to Proof of Stake. The acceptance of Proof of Stake as the consensus mechanism is expected to grow even further.