2021-10-14
Understanding Proof of Stake (PoS)
The most popular consensus algorithm is proof of work which is used in many blockchain networks including Bitcoin and Ethereum. Proof of work is known to be very secure and achieve decentralisation. However, it comes with many drawbacks. In this article, we will go through the original consensus mechanism, which is proof of work, its drawbacks, and how the proof of stake approach tries to solve the former’s problems.
Despite successfully kickstarted the whole blockchain and cryptocurrency industry, Bitcoin and its mining activities have received many criticisms from its own community and the whole crypto movement. Proof of work is an expensive task. It requires massive amount of computational power to maintain the blockchain. At the same time, energy is wasted for nodes that failed to mine the blocks. Therefore, proof of work is seen as unsustainable in the long run as it leaves massive carbon footprint.
Proof of work is also difficult to scale. As the time to mine each block is too long, the number of transactions that can be done is too little. Therefore, proof of work mechanism is seen as unsuitable for a large-scale decentralized finance system.
Proof of stake is a consensus mechanism where validators validate blocks based on the number of tokens that they stake on the network. The higher the staking amount, the higher the chance of being selected as validator. Proof of stake was introduced to solve some of the issues with proof of work. These include scalability and sustainability to the environment.
Consensus in a proof of stake mechanism is achieved by the validators who stake their own coin into the network. This is different than proof of work mechanism since proof of work requires all miners to spend their computational power to reach consensus while for proof of stake, it depends on the amount of coin staked on the network.
Since the validators are selected before a block is chained into the blockchain, this speeds up the transaction confirmation time to a much lesser value than the proof of work algorithm. As such, proof of stake algorithm can handle much higher transactions per second in the blockchain. This increases its scalability potential.
Proof of work is known to rack up the amount of electricity used to mine blocks in the blockchain. In addition, single-purpose machine to mine new blocks such as ASIC leaves massive carbon footprints. Proof of stake addresses this issue by requiring validators to stake their coins instead of computational power. As such, proof of stake removes the need to compete based on computational power and therefore single-purpose machine like ASIC is no longer needed. This drastically reduces the energy consumption.
In proof of work, attacks from malicious nodes can happen if the attacker controls majority of the nodes. This is known as the 51% attack. Such an attack is very expensive since to control majority of the nodes, the attacker would need to take control of at least 51% of the computational power.
In proof of stake, since validating blocks require the validators to stake their coins into the network, an attacker would need to acquire 51% of the coins in the network to create fraudulent blocks. Obtaining the majority of the coins is a very difficult task to do. In addition, an attack on the network would discourage others to use it, and therefore reduces its value. This would be a catastrophe for the majority shareholders, which is the attacker itself. If the attack fails, the attacker would lose the staked coins, and therefore would also be at a loss. It would be at the best interest of the attacker to maintain the network than to tamper with it.
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