Last Updated:
April 1, 2022

What Is Proof of Stake?

What Is Proof of Stake?

What Is Proof of Stake?

What is Proof of Stake, and why was it decided to include it in Ethereum 2.0 by blockchain developers? Is it truly more scalable than Proof of Work, and if so, will staking eventually supplant mining?

Ethereum released a new Proof of Stake (PoS) network in December 2020, which works alongside the old Proof of Work (PoW) network. While the complete version of the new network has yet to be released, users can now get a sneak peek into the future.

What is the purpose of Proof of Stake? Because it has the potential to make all blockchain networks scalable and, as a result, ready for widespread adoption. While we may think of blockchain technology as being significantly superior to legacy tech platforms, the process is that most blockchain networks are unable to handle the same burden as centralized systems.

Vitalik Buterin, the co-founder of Ethereum, had long planned to migrate to Proof of Stake. However, no one in the blockchain business, not even a single developer, had any idea how to put the upgrade into practice.

PoS has several flaws, which entirely disable the three core features of the blockchain trilemma (decentralized, scalable, secure.) Although the core concept of PoS networks is straightforward, the solutions are highly complex.

Are you interested in learning more about the next step of blockchain evolution? Continue reading our in-depth but easy-to-understand Proof of Stake guide.

What is Proof of Stake, and how does it work? When was it first released?

Proof of Stake is a consensus process that Ethereum developers have worked on since the network's inception. In reality, the concept predates Ethereum, with the earliest mention of PoS occurring in 2012.

Peercoin's developers, Sunny King and Scott Nadal issued a co-written paper at the time that presented PoS as an alternative to PoW. They argued that there should be a more cost-effective way to mine Bitcoin, which does not require a lot of electricity.

The Bitcoin network was so small at the time that all of its users combined spent only about $150,000 on energy each year. According to current estimates, miners spend more than $5 billion each year on power. There must be a better method to keep the network running; given the high cost of mining and the negative impact on the environment, there must be a better method to keep the network running, right?

Validators would stake instead of mining to confirm transactions in a PoS system. Individuals who stake more coins are given priority on the blockchain network, and the more oversized holders will have an easier time winning rewards.

Staking is a more energy-efficient technique to maintain blockchains because it does not require the process of complex mathematical problems over a lengthy period. After all, the process is virtually entirely virtual, comprising merely the act of securing digital currencies. It should reduce costs and energy even if it isn't better at scaling.

Related Reading: Proof of Work vs. Proof of Stake

Proof of Stake is challenging to implement for four reasons.

There are four primary reasons why PoS is difficult to deploy in an entire network without causing it to crash. Staking, as previously stated, is a good idea in theory. However, the issue begins when we consider how individuals might want to harm the network, take it over, or attack it in various ways.

There will be only one staker to rule them all.

A miner's reward potential in PoW is increased by donating more power to the network. The same is done with PoS, but with the addition of staking (locking up) tokens. If a single staker (or a group of stakers) acquires many tokens, he will be entitled to a significant part of all future tokens.

Tokens are more accessible due to their virtual design and eventually symbolize a user's authority within the network. With PoW, this is not the case. Miners must designate physical space for their rigs, find enough power sources to sustain the mining farm, and deal with government rules and bans.

While enough money can transform PoW and PoS participants into network rulers, mining objectively requires more procedures and risks.

Attacks are more accessible in 51 percent of cases.

A user can take control of the network by gathering more than 51% of its power, just as in the previous example. We discussed why it is easier to collect energy in a PoS network in the last scenario.

We can see yet another barrier to Proof of Stake implementation for developers with that in mind.

No token distribution technique exists.

When Bitcoin originally became popular, users were required to set up a node and a wallet. They would then use their computer to complete the mining process. The user would be paid for their work if a miner successfully solved the next block in the Bitcoin blockchain. The network steadily distributes Bitcoin with each payment.

Consider the case of John Smith, who launched Project Proof of Stake, a PoS-based blockchain network. New users join the network, create a wallet, and get ready to stake their coins. But how do you stake your tokens?

Distributing cryptocurrencies via PoS networks is initially a catch-22 paradox with no clear solution. Existing tokens must be locked to receive new tokens. When there aren't any tokens, how do you stake them?

Some projects have employed pre-mined tokens as a solution. Several tokens have previously circulated in the market in a pre-mined project. However, this is not the most excellent option because it only raises the issue of how decentralized a network can be.

Is there nothing at stake?

Finally, we have a unique situation where network participants can spend twice as much.

To refresh your memory, double spending refers to the process of using the same coins or tokens more than once. To solve this difficulty, PoW systems employ the method of timestamping transactions.

Users in PoS can have 'Nothing at Stake' in one hypothetical case (NoS). The network will add a block whenever a node meets specific staking criteria. The issue is that two nodes can satisfy the requirements simultaneously.

The token forks when this happens. Nodes work around the difficulty by signing transactions on only one of the two forks.

The unique concern that NoS introduces is that a vast majority of nodes can choose to sign the transaction on both forked networks because verifying both is free. As a result, sure network participants can double-spend their tokens by spending them on one web and then verifying them on another.

How does it work?

We explained Proof of Work and how it works in one of our previous articles. You may already know what a consensus mechanism is and why distributed and decentralized systems require it if you've read it. If you don't know what I'm talking about, here's a quick rundown:

To verify the validity and spendability of coins, blockchain networks store and permanently record transaction information. All members must achieve a consensus and agree on a specific version of the network to work correctly and for all data to remain intact without tampering.

Proof of Stake, like PoW, is a consensus mechanism. Validation and consensus approaches, on the other hand, are very different.

Miners, as a reminder, use electrical energy to solve complex mathematical problems to mine blocks (and, in the same act, create them). Validators, who stake assets to validate blocks and so build a chain, take the position of miners in pos

The user must run a validator node that checks and confirms blocks to use Proof of Stake. The network can pick the node and propose a block by staking tokens. Although the selection process is somewhat random, it favors nodes based on wealth and staking age.

Once validated enough times, the network will formally add the proposed block to the ledger. The previously chosen node will be rewarded for proposing and validating the block. All other validators will only be compensated if they verify.

Staking's economic foundation

Compared to its older brother PoW, Proof of Stake has a different economic incentive. Because the personal deposit funds when participating in the network, validators face even harsher punishments for malicious behavior.

To engage actively in PoW, miners need to pay electricity costs. Validators in a Proof-of-Stake system must stake a high number of valued tokens. On Ethereum 2.0, for example, the minimum requirement is 32 Ether.

The staking investment is worth $40,000 at today's market pricing. Furthermore, if the actor acts unfairly or does not correctly validate transactions, the network may confiscate a portion of these funds.

If it is a specific node's time to validate the block, but he is unavailable, he must pay penalties. Assume running a node, and your building loses power or internet access. What role will you play in the network? The only option for a validator in such a situation is to pay the penalty and participate more regularly.

However, when compared to directed and purposeful malicious behaviors, the penalty of not being online is significantly lower. If a node tries to deceive the system by presenting a false or modified transaction data history, the network will take a significant amount of the node's staked assets. The malicious actor may lose everything in some cases.

With the preceding information in mind, features easy to see why PoS has more significant economic incentives. While validating is less complicated than mining, it comes with significantly more risks and penalties.

Proof of Stake's advantages

If PoS is appropriately implemented and all (or the majority) of the constraints are addressed, the new consensus mechanism features numerous advantages over PoW. In reality, the new technique eliminates some of the negative aspects of PoW networks.

Improved scalability

While the PoS method does not promote scalability, several features based on the same technological infrastructure do. Developers designed sharding to grow PoS since it allows them to increase network speed while maintaining a secure environment.

Sharding is splitting a chain into numerous shards, each capable of processing and creating blocks. The leading blockchain network runs quicker because nodes simultaneously validate blocks across multiple shards/chains.

This concept is comparable to that of computer technology, in which processors have numerous cores (as well as threads) that individually power the same process.

Decentralization should be improved.

In this perspective, we might consider Proof of Stake networks more decentralized because they avoid some of the drawbacks associated with PoW. The validator does not require expensive mining hardware, nor does he need the storage space that mining rigs demand, nor does he have any concerns about cutting electricity costs.

PoS is more decentralized since it has a low entry barrier, allowing people from all walks of life to join the network. To run a validator node, you need an internet connection, a computer, and a specific quantity of cryptocurrency. As a result, PoS is more decentralized than PoW.

Improved accessibility

When it comes to accessibility, the same advantages that we described earlier are evident. Investing in cryptocurrencies or actively trading in the market necessitates the same instruments as joining any PoS network. PoS is more accessible to access and participate in than the earlier consensus mechanism.

On the other hand, the staking requirement limits accessibility to some extent. We can confidently state that most users, especially at current pricing, cannot afford the 32 ETH required to stake in Ethereum 2.0.

Nonetheless, we may see newer PoS networks emerge in the future that does not necessitate such a significant staking investment. Furthermore, just as Bitcoin miners share the same mining pools, Ethereum 2.0 may see shared validator pools.

On Ethereum 2.0, how does Proof of Stake work?

Instead of releasing a single significant upgrade, blockchain developers want to release updates regularly. The same principle applies to Ethereum 2.0, which will be released in stages.

Ethereum created a deposit contract for the future network in November 2020. The project's smart contract automatically started the first stage of Ethereum 2.0 Phase 0 after collecting more than 500,000 ETH from future validators.

The beacon chain's job is to introduce network features like staking and sharding gradually. The first step in Phase 0 was to compile a list of all the initial validators who would be joining the new ledger.

A user must stake at least 32 ETH to participate as a validator. Validators are nodes on Ethereum 2.0 that confirm transactions and create new blocks. A single user can run many nodes, but each one costs 32 Ether.

According to the developers, two, if not three, further phases are expected to be released in 2021. Phase 1, Phase 1.5, and Phase 2 would gradually but steadily implement all of the features required to launch Ethereum 2.0's final and complete version.

The staging process does not have a set strategy or schedule. The majority of community members, on the other hand, believe that developers will release at least Phase 1 and Phase 1.5 by the end of the year. The last phase could start in 2021 as well, although consumers are concerned about how Ethereum 2.0 will evolve.

Ethereum 2.0 will replace the previous PoW network by completing the launch process. Both chains will work side by side until that time comes.

Conclusion

Proof of Stake is a proposed replacement for the Proof of Work consensus mechanism. The concept of the coin age was first proposed in August 2012, when two developers realized that it might be used to replace PoW and boost energy efficiency.

Since 2015, Ethereum developers have diligently converted their network from PoW to PoS. After a five-year wait, the team has unveiled the first part of Ethereum 2.0. We're still waiting to see if the new network can handle the same amount of network as the previous one. PoS, on the other hand, is expected to outscale the older approach, according to developers.

Validators must stake assets to participate in the Proof of Stake network, which substitutes miners. Blockchains can become more scalable, decentralized, and accessible to everyone, thanks to the multiple features available in PoS architecture.

For a long time, PoS has been a ray of hope for blockchain fans worried about the sector's future. Without any signs of scalability, blockchains would never be able to compete with centralized systems on a large scale.

Will Ethereum 2.0 put those misgivings to rest, ushering in a new era of decentralized finance?