The Proof of Stake (PoS) mechanism is a type of blockchain consensus mechanism used to reach agreement on the state of the blockchain and validate transactions. In a PoS blockchain, validators are selected to create new blocks and validate transactions based on the amount of cryptocurrency they hold and are willing to 'stake' as collateral. This is different from Proof of Work (PoW) consensus, where validators (miners) use specific hardware to solve complex mathematical problems to validate transactions.
The idea behind PoS is that participants with a higher stake in the cryptocurrency have a greater interest in maintaining the integrity of the network, as they have more to lose if they act maliciously. This is intended to reduce the hardware-intensive PoW approach. PoS is seen as a more energy efficient alternative, and aims to provide a secure and decentralised way of achieving consensus in blockchain networks.
How PoS works
The core mechanism of PoS revolves around validators and the assets they stake. To become a validator, there are several key requirements and steps. The details vary depending on the blockchain platform, but some common elements are:
- Staking capital
Validators must have a certain amount of cryptocurrency to apply to run a validator node. The more cryptocurrency a validator holds as collateral, the greater the likelihood of being selected as a validator for transactions and thus reaping the associated staking rewards. The amount required for staking varies from blockchain to blockchain. For example, if you want to activate your own ETH validator node, you will need 32ETH.
- Blockchain wallet
Validators need a blockchain wallet that supports the specific PoS mechanism used by the blockchain. This wallet is where the staked cryptocurrency is stored.
- Network connectivity
Validators must have a stable and reliable Internet connection. This is essential for timely participation in the block creation and validation process. A consistent connection helps to prevent disruptions that could affect the validator's ability to perform their role effectively. In the event of downtime or technical problems, some validators may be penalised by being "slashed". This means that the rewards they receive are reduced. This provides an incentive for validators to support the network and work towards its improvement.
- Technical competence
Validators should have a certain level of technical competence. While some blockchain networks offer user-friendly interfaces for staking, an understanding of the underlying technology and potential troubleshooting is beneficial. Knowledge of specific PoS protocols, blockchain software and system requirements is essential.
Users who do not have the necessary capital or know-how, but still want to benefit from staking rewards, can delegate their crypto assets to established validators and their staking pools. Users receive a percentage reward based on their stakes.
Pros and cons of PoS
PoS is more energy efficient than PoW. The PoW miners, which consume a lot of electricity, are not needed in a PoS network. PoS also promotes decentralisation by providing economic incentives for participants to act in the best interest of the network, and makes it relatively easy to set up a validator node without additional equipment.
PoS also reduces the risk of a 51% attack. This is a scenario where one entity controls more than 50% of the computing power in the network. In PoS, an attacker would need to acquire a majority of the cryptocurrency supply, which is economically challenging. Some PoS networks include governance mechanisms that allow validators to participate in decision-making processes. This involvement fosters a sense of community and gives validators a role in shaping the future of the network.
A particularly challenging issue is preventing 'deep' reorganisation of the blockchain, where previous transactions are duplicated. As a proof of work, it is not possible to present a false "history" of transactions because the computation was used to create the chain. But with PoS, malicious miners can easily "simulate" a blockchain that appears valid when in fact it is not. The most advanced proof-of-stake networks solve this problem by splitting the chain into "epochs" and encouraging honest behaviour through the mechanism described above.