Proof of Stake (PoS) has turned out to be the most popular consensus mechanism. Even blockchains initially designed to use other consensus protocols are transitioning to this consensus protocol.
In September 2022, Ethereum, the second-largest blockchain in terms of market capitalization and also as a framework for building smart contracts, transitioned to a proof-of-stake system.
Proof of Stake was first used in 2012 on a blockchain known as Peercoin, launched by developers Scott Nadal and Sunny King. However, it is Ethereum that popularized it after its launch in 2015.
But what is Proof-of-Stake, and how does it work?
All permissionless blockchains need a mechanism through which nodes on their peer-to-peer networks can find consensus on updating the shared ledger of transactions or smart contract executions.
The basic process involves the core protocol picking one validator, a computer node, at intervals to process the transactions on behalf of the entire peer-to-peer network. In return, the selected validator nodes are rewarded with newly minted coins and the fees users of the blockchain pay.
Selecting the node that updates the ledger on behalf of others is the critical area in which blockchains differ. For those using Proof of Work (PoW), such as Bitcoin, the selection is achieved by the computers on the network competing to solve complex mathematical problems. This is an energy-intensive process. The computer that wins this competition gets to update the ledger and keep the reward.
Meanwhile, blockchains that use Proof of Stake (PoS) base the election of the node that updates the ledger not on its ability to beat others in solving a mathematical equation but on the number of coins it stakes. The higher the number of coins a node holds in a wallet, the higher the chances of it being selected to update the ledger and earn the reward in an otherwise randomized process.
The primary reason why Proof of Stake has become popular with developers, as well as end users, is that it does not consume a significant amount of energy. This consensus algorithm contributes to a significantly low carbon print, especially when compared to PoW.
According to an energy consumption index by the University of Cambridge, the Bitcoin network consumes about 100 Terawatts per hour (TWh) annually. That is more than what the majority of countries around the world consume. Meanwhile, Ethereum has reduced its energy consumption by up to 99% after transitioning.
In comparing proof of work and Proof of Stake, the often sticking point besides energy consumption is the security of the consensus protocols.
The protocol achieves the security of Proof of Work by making it costly to effect an attack on the network. In particular, an attacker must accumulate a significant amount of computer or hash rate power and pay for a proportional amount of energy.
These two ingredients' costs are incredibly high, especially at the levels necessary to compromise the network. And even if one can afford it, they have to consider whether they want to ‘burn’ such a vast amount of resources without getting anything in return.
Meanwhile, even if they can afford it and are willing to burn such a vast amount of resources, the rest of the network can hard-fork and ignore the nefarious activities of the attacker.
When it comes to POS systems, the cost of attacking the network comes in the form of accumulating stashes of the native tokens so that the attacker has a higher stake than most others on the network.
Unless a bad actor can compromise how coins are minted so that they award themselves a high amount or can steal from others, it can be extremely expensive to accumulate a large enough stake to dominate the network.
Also, the more coins someone collects on a network, the more they need the network to be secure so that their investment is safe. Otherwise, the bad actor will be burning a vast amount of resources without getting anything in return.
Even if an entity can afford to accumulate a significant stake to dominate the network, the other stakeholders can hard fork and ignore their nefarious activity.
The vulnerability of Proof of Stake has mostly been illustrated in theory. With over 60% of major blockchains using the Proof-of-Stake consensus mechanism, there has hardly been any that has been successfully attacked and compromised, especially through the shared ledger.
With that being the case, there are many steps that developers can take to avoid a few individuals having significant stakes without a high cost to them. That includes having a robust token distribution mechanism at the start of a project. That also includes encouraging decentralization through such features as having low-stake requirements.
It also helps when wallets used by ordinary users and stakers are highly secure so that an attacker can not steal coins on a large scale and have a significant stake at a low cost to them.
It is becoming apparent that blockchains using Proof of Stake are as secure as those that use Proof of Work. Meanwhile, besides getting high security, applications used on the blockchain end up having a significantly low carbon print.
In addition, new blocks in Proof of Stake are added to the blockchain networks through a deterministic process that does not require significant computing power or energy-intensive mining. This makes the system more sustainable while also reducing the need for block rewards that incentivize miners to consume more energy in PoW.
The list of blockchains that use Proof of Stake has continued to grow. Most of the newly launched ones are almost all of them PoS based. The most notable coins that exist on PoS blockchains include the following:
Until September 2022, when it implemented The Merge transition, Ethereum was the other major blockchain using Proof of Work besides Bitcoin. After transitioning, ETH is now the digital currency on a PoS blockchain with the highest market capitalization. Meanwhile, the ethereum network still maintains its second position overall, and the blockchain remains the top most-used smart contract platform.
Tezos is a blockchain designed to support the creation and execution of smart contracts and the building of decentralized applications. Besides high transaction capacity, the platform promises more robust and secure mechanisms for upgrading its core protocol without risking hard forks. It uses a version of PoS known as liquid proof of stake (LPoS).
The native coin XTS is ranked in the top 50 most-valued coins on CoinMarketCap. The coin is used in the blockchain's governance structure and as the means by which users pay fees to use the network.
Cosmos is a framework designed to facilitate the building of many interoperable blockchains. The ultimate goal is to spur the emergence of an internet of PoS blockchains. The ecosystem has ATOM as the native coin. The holders of this coin help maintain the network through staking.
The ATOM network uses a version of proof of Stake known as Tendermint BFT.
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