At the basic level, what makes blockchain a disruptive technology is the ability of independent computers (nodes) on a peer-to-peer (P2P) network to agree on specific facts on a shared ledger or the state of a smart contract and continuously update them through consensus algorithms.
The consensus happens by an automated system of rules (protocol) randomly picking a node at regular intervals to update the ledger on behalf of the entire network.
The first consensus protocol used for this purpose on a blockchain is proof of work (PoW), which the Bitcoin network uses. However, today close to 60% of public blockchains use some variant of the proof of stake (PoS).
Proof of stake (POS) is a consensus mechanism that bases the selection of the node that updates the shared ledger on the number of coins it holds (stakes). The coins become like lottery tickets. The more coins a node stakes, the more it is likely to be picked to update the ledger or state of a smart contract.
In contrast, when using the proof-of-work consensus mechanism, a node to update the ledger is picked based on how it performs in a competition to solve a mathematical problem.
Like it is the case with other consensus protocols, to join a proof-of-stake network, a node needs to download and install the core software. With that done, it can communicate and collaborate with others on the network.
Before participating in maintaining the shared ledger or smart contracts on the blockchain, a node has to add and lock some native coins (the digital tokens that reside on the blockchain) in its wallet. This amount of fund is what is known as a stake.
The purpose of staking is so that the node acts honestly when updating the shared ledger or the state of a smart contract on the blockchain. The node owner understands that if they do not act appropriately, they will be harming their own value.
The staker can only send the coins staked to another wallet after they cease participating in the maintenance of the shared ledger. Cardano is one of the few blockchains that allow the node to cash out even as they actively maintain the shared ledger.
The exact amount of coins to stake depends on what the crypto mining protocol stipulates. Most proof-of-stake blockchain networks have a minimum amount. For example, to stake on the Ethereum network, when it transitions to POS, you will need at least 32 ETH.
The more coins a node stakes above the minimum, there is a higher chance it is picked to add transitions to the shared ledger. That means its capacity to earn from rewards and fees increases with the stake amount.
Some blockchains use a variant of proof-of-stake known as delegated proof of stake (DPOS). With this consensus mechanism variant, users who cannot set up and run a node can lend their coins to someone with a node. This is known as delegating.
The delegators increase the chances of a node being picked to maintain the ledger. Whenever the node earns a reward, the delegators share it based on how many coins they contributed.
A node on a proof of stake blockchain network performs three primary functions.
First, it adds transactions to the ledger whenever the protocol picks it, and for this, it earns the staking reward, which includes newly minted coins and the transaction fees users pay.
The second function is to validate the transaction blocks other nodes add to the ledger. This is like approving them. If most nodes don't validate a block added by a node, it is ignored, and the transactions will be added by the next node.
On some blockchains, nodes share the block reward and fees for validating new transactions. On other blockchains, they do not earn anything for playing that role.
The third function of the node is to relay data to other nodes on the network. This data includes unconfirmed transactions, confirmed transactions, and data from oracles to smart contracts.
After every short while (ranging from seconds to minutes, depending on the blockchain), one of the nodes is picked to take all initiated transactions and add them to the ledger.
The node takes transactions initiated around the time it was picked, puts them together into a block, and adds them to the ledger. The other nodes will take audit and validate the block.
In Proof-of-work, a node to add the next block of transactions on the shared ledger is picked after it becomes the first to solve a mathematical problem.
In the proof of stake network, the node that adds transactions on the shared ledger is picked based on the number of coins it stakes.
Both proof-of-work and proof-of-stake have strengths and weaknesses. For example, PoW is often considered more secure because one needs resources from the real world in the form of expensive hardware and a lot of computational power to attack it. On the other hand, it is considered a danger to the environment as it is not energy efficient.
Picking a node to add a new transaction to the shared ledger through solving mathematical problems requires a significant amount of computing power. This makes the process energy-intensive.
The need for a significant amount of computational power and electricity are barriers to entry.
This barrier to entry has made proof-of-stake the most preferred consensus mechanism, especially in a world that is becoming sensitive to greenhouse emissions. It does not require extraordinary amounts of computing power and electric energy.
Besides being friendly to the environment by not consuming a significant amount of energy, proof of stake offers other benefits.
Since the network does not spend a significant amount of electricity, the cost of processing a transaction is significantly lower as compared to transactions processed on the proof of work networks.
Proof of stake blockchains also tends to have more scalability options such as sharding, which increase their capacity, reduce the cost of processing transactions, and increase the speed at which transactions are processed.
The proof of stake consensus mechanism does have a few weaknesses. One of those is the nothing at stake problem. This is where a staking node can support two branches at the same time, which can lead to confusion. This however has often been solved in some blockchains through the threat of slashing (taking away some or all the coins staked).
The list of consensus mechanisms is growing. Indeed, even proof of stake has numerous variants to choose from. All this can be confusing and difficult to follow. The team behind the Casper project understands this, and we have solutions in place to make it easy to onboard the technology
Contact Us Today for More Blockchain Resources.
Image courtesy of Pixabay.
