Proof of Stake (PoS) is a consensus mechanism that was first proposed in the BitcoinTalk forum back in 2011. Solving existing problems and flaws in the most popular consensus mechanism Proof of Work (PoW) was the main incentive ultimately leading to the development of PoS.
While both of these mechanisms share the same goal of reaching consensus within the blockchain, the exact process as to how this goal is reached differs between the two. One of the main differences lies in the selection process. In PoS blockchains selecting someone in charge mainly depends on the size of stake each network participant owns. The higher the stake, the higher the chances to be selected.
What is Staking?
Any holder of a currency of a PoS blockchain can decide whether they want to participate in the block forging process. “Staking” is merely the official naming convention given to describe the participation in the block forging process. Essentially, staking increases the network’s security by setting the bar higher for any malicious party attempting to acquire 51% of all staked currency in the network, which would allow them to forge and approve invalid transactions.
Hence, any PoS blockchain network incentivizes holders of the respective staked cryptocurrency by paying them interest on the staked amount.
In some blockchains, the staked tokens may require to be locked up for a certain amount of time (usually a few days). This implies that selling the respective PoS cryptocurrency during the lock period is not possible.
What is the benefit of staking?
As briefly described before, one of the biggest threats to any blockchain is a so-called 51% attack of the blockchain’s underlying resource. For Proof of Work blockchains that translates to some participatory party acquiring 51% of the available computing power in the network. Similarly, for Proof of Stake, it means some party to hold 51% or more of the staked amount of a respective cryptocurrency.
As a reminder, holding 51% of a blockchain’s notion of resource allows the attacker to forge new invalid transactions and approve them while retaining consensus since all other participants believe in what the majority of the network approves.
But back to the original question, what is the benefit of staking? Evidently, it improves the network’s security. Additionally, the individual holder gets paid an interest in the form of the cryptocurrency staked. Most commonly, this interest is made up of a subsidy part as well as transaction fees.
Firstly, the subsidy can be understood as new coins being created following a monetary policy - a concept copied from PoW blockchains like Bitcoin. New Bitcoins are created and granted to miners for every new block produced - however, only until a total sum of 21 Million Bitcoins are circulating in the network, as the final amount of Bitcoin ever to exist is limited by its native algorithm. Bitcoin’s monetary policy (source code) implements its limited supply through a halving of this subsidy every 210.000 blocks which approximate to every four years. Every blockchain has different monetary policies so Bitcoin is just one example.
Secondly, part of the interest also comes from transactions being processed in the particular block. Each transaction pays a fee that is correlated to the size of the transaction and the amount of memory required for it to be stored by all miners. These fees are paid to the miner that produces the block.
In general, when speaking of producing blocks on PoW blockchains, blocks are being mined - in contrast to PoS blockchains where blocks are minted.
What are popular Proof of Stake Blockchains?
The top Proof of Stake cryptocurrencies in 2021 are:
There are many PoS blockchains with very different characteristics varying in their monetary policies up to different ways of staking. We chose to support Cardano and run a stakepool named Berlin Pool which, anyone who owns ADA - Cardano’s native cryptocurrency, can join and earn rewards/ interest on their stake.
Our decision to opt for Cardano stems from its simplicity, the fact it is research-based, has no lock-up time, as well as being very secure when it comes to staking, using delegated Proof of Stake as a consensus mechanism.
General proof of stake requires holders to pool together to increase their chances for block production, similar to miners that pool together computing power in mining pools. Unlike other PoS blockchains that require users to send their stake to a pool or smart contract directly to be staked, staking on Cardano does not require you to give up control over your money for the time of staking.
Cardano stakers can just delegate ADA to a stakepool of their choice. Such delegation, however, does not send ADA to a pool - the currency continues to exist in the owner’s wallet. Instead, the pool is granted staking rights, which increases the pool’s weight/ chance to be selected for producing new blocks. Put simply, a stakepool never owns any of your ADA and you can revoke the delegation or send/ sell your staked ADA any time.
Pros & Cons of Proof of Stake
One main criticism voiced by many is the concern of wealthier individuals potentially being favored by the network in the long run. In order to prevent this imbalance, more unique methods are added to the selection process, such as randomized block selection or selection based on coin age.
Taking this into consideration, proof of stake can become more decentralized than PoW over time - if the parameters are designed correctly. With time, as the currency increases in value, the distribution of the currency tends to become more egalitarian - similar to equity held by founders in large companies.
When starting Microsoft, Bill Gates owned 64% of the shares. Now, he owns less than 5%.
Another great advantage of a synthetic resource like a cryptocurrency in PoS lies in its portability. For instance, China just decided mining is bad and forces miners to shut down their data centers. Moving their data centers to different jurisdictions is a big problem. A virtual resource can be redeployed to a different jurisdiction with a click of a button.
Furthermore, there are other advantages to proof of stake such as energy efficiency, low barrier of entry (as there is no need to purchase expensive hardware) and lastly, PoS has a much higher transaction throughput. Therefore, transactions are processed faster than on PoW blockchains, which depend on expensive hardware to solve the cryptographic puzzle.
What is Proof of Stake (PoS)?
by William Wolff
by William Wolff
by William Wolff
by William Wolff
by William Wolff