The most critical component of any online transactional platform is a ledger. This is where payment and contractual states are recorded and updated according to the users' requests. In a centralized system, maintaining the ledger is the responsibility of a central authority acting directly or through agents.
In decentralized systems built on peer-to-peer networks (blockchains), however, there is no central authority to guide how the ledger is updated. So how does proof of stake verify transactions? In decentralized systems, particularly those leveraging Proof of Stake (PoS), the ledger's evolution takes on a distinctive character. PoS introduces a mechanism where transaction verification is tied to the amount of cryptocurrency a participant is willing to stake.
Proof of Stake (PoS) is one of close to 20 consensus protocols that are used by different blockchain systems to maintain shared ledgers. With that stated, over 60% of all blockchains use PoS.
The computers (nodes) on a blockchain’s peer-to-peer network can efficiently and securely update or maintain the shared ledger through a consensus protocol. It facilitates the network to collaborate in performing that task.
While both PoW and PoS have their advantages and disadvantages, PoS is generally considered to be more energy-efficient, secure, and sustainable than PoW. PoS is also the most used consensus protocol, but Proof of Work (PoW) was the first ever used. It is the protocol the Bitcoin blockchain uses.
The following are three primary reasons PoS is the most popular consensus protocol for blockchain technology and why it is preferred over PoW:
The PoW consensus protocol is designed such that updating the shared ledger involves hashing corpus data, a process that consumes a significant amount of energy and computational power.
According to the Cambridge Bitcoin Electricity Consumption Index, the network consumes up to 130 Terawatt hours (TWh) annually. That is more than what many countries around the world consume.
The difference in the amount consumed between PoW and PoS is enormous. For example, after transitioning from proof of work to proof of stake, the Ethereum network reduced its energy consumption by up to 99%. That means that the PoS networks contribute negligible greenhouse gas emissions.
Owing to the lower cost incurred by those who help maintain the shared ledger, especially given that they don't have to pay a high electric bill, the transactions on the network can be charged significantly lower transaction fees.
It also makes it easier to scale the network to handle more transactions per second, reducing how long a user waits before their transaction is processed.
Indeed, one of the motivations for transitioning Ethereum to Proof of Stake was so that the network could easily implement layer one and layer two scaling solutions. In particular, it made sharding possible.
Given that PoW involves the computers (miners) hashing data and needing to do it at high speed, acquiring or building special equipment for that purpose has been necessary. On the Bitcoin network, for example, one has to accumulate a significant amount of computer power in application-specific integrated circuit (ASIC) chips to be competitive enough on the network as a miner.
With PoS networks, it is mainly unnecessary to acquire special equipment. Often readily available hardware can be installed with the core software and used to perform the mining (staking) process.
In general, blockchain consensus protocols maintain a shared ledger by having one node selected for a moment to update it on behalf of the P2P network. The PoW protocol does this by having the nodes compete to solve a complex mathematical problem through data hashing.
On the other hand, the Proof of Stake protocol randomly selects a computer (node) to update the ledger based on the number of native coins it holds (stakes) in its wallet. The more coins staked, the higher chances for the computer being selected to validate transactions. These chosen validators are still responsible for verifying new transactions and creating new blocks by solving complex cryptographic algorithms, which significantly reduces energy consumption and computing power.
Besides payments, the transactions recorded on the blockchain include executions of smart contract states. A smart contract is an algorithm that self-executes when predefined conditions are met.
While payment and smart contract transactions perform different functions, they are updated on the same shared ledger and processed similarly.
The person who joins the PoS blockchain network to help maintain the shared ledger is known as a staker or a node. They join the network through a computer installed with the necessary core software.
A staker can have other users delegate their coins to them, which increases the chances of their node being selected to update the ledger. That means that the other users signal to the blockchain network to consider the coins they own as part of the stake of the particular node. In return, the person who runs the node shares with them the reward they earn.
To update the shared ledger, the selected node compiles all the initiated transactions (both payment and smart contract) into a block that they then add to the shared ledger. The rest of the network checks the block's validity and approves it by reconciling their local copy of the shared ledger to reflect the new changes.
The incentive of most of those who participate in updating and maintaining the shared ledger is to earn rewards that come in the form of fees users pay and the new coins the protocol releases to circulation. The more coins a node stakes, the more times it is likely to be selected to update the ledger and the more reward it is likely to earn.
Where delegating is allowed, the node shares the reward with all those who added their coins to its staking pools.
