Understanding proof of stake is very important for those investing in cryptocurrency. Here’s a guide to What Proof of Stake is, How Proof of Stake works, whether Proof of Stake is secure, and How it affects the environment.
Proof of Stake Explained!
Because cryptocurrencies are decentralized and not controlled by financial institutions, they require a method to verify transactions. Proof of stake (PoS) is one method that many cryptos employ.
Proof of stake is a consensus mechanism that is used to validate cryptocurrency transactions. Owners of cryptocurrencies can stake their coins in this system, giving them the right to check for new blocks of transactions and add them to the blockchain.
This method is an alternative to proof of work, Bitcoin’s first consensus mechanism. Proof of stake has grown in popularity as concern about the environmental impact of cryptocurrency mining has grown.
What’s Proof of Stake?
Proof-of-stake is a cryptocurrency consensus algorithm for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries in a distributed database and keeping the database secure. This is achieved when at least 51% of the nodes, i.e., computers on the blockchain, reach an agreement on a certain truth before execution.
How Proof of Stake Works
How Proof of Stake Works deals with the proof-of-stake model, which allows cryptocurrency owners to stake coins and set up their own validator nodes. Staking is the act of pledging your coins to be used for transaction verification.
You can run a fixed stake, which locks up your coins for a specific period of time while you stake them, but with flexible staking, you can stake and unstake at any time. When a block of transactions is ready to be processed, the proof-of-stake protocol of the cryptocurrency will select a validator node to validate the transaction.
The node verifies that the transactions in the block are correct. If this is the case, they add the block to the blockchain and receive cryptocurrency rewards for their efforts. However, if a validator running a node proposes adding a block with incorrect information, they will be penalized by losing some of their staked holdings.
Proof of Stake Vs Proof of Work
Proof of work and proof of stake are both algorithms used to keep the blockchain network secure, allowing users to add new cryptocurrency transactions to the Blockchain. But there is a distinction between the two; let’s find out.
Proof of Stake
Validators who own the coins associated with the blockchain are used in Proof of Stake (PoS). A validator is chosen at random with proof of stake, based in part on how many coins they have locked up in the blockchain network, also known as staking. This is how Proof of Stake works.
The coins serve as collateral, and when a participant, or node, is selected to validate a transaction, they are rewarded. Proof of stake requires multiple validators (i.e. 51% of the network) to agree that a transaction is correct, and the transaction is valid once enough nodes verify it.
Proof of Stake, unlike Proof of Work, is much more energy efficient and lowers the barrier to entry because it does not require the use of sophisticated energy-draining machines like POW.
Proof of work
Proof of work (PoW) has been a part of the cryptocurrency market since its inception, having been incorporated into the Bitcoin blockchain when it launched in 2009. In practice, proof of work means that as new transactions are added to a blockchain network, other computers on the network must validate and approve them before new blocks are created and added to the blockchain.
You can check out this great article on How Crypto Wallet Works
Proof of work requires computers to solve cryptographic puzzles, putting in “work” in order to be rewarded with the ability to verify or validate, blockchain transactions. It’s called cryptocurrency mining, and it’s a lot like a game.
The idea is that by using a long string of numbers and letters known as hashes, malicious attacks can be avoided and transactions can be validated. When data is passed through a network function, which is the foundation of blockchain transactions, it can only generate one hash.
As a result, when transactions (such as Bitcoin transfers to another person) occur on the blockchain, the resulting hash is distributed across the entire network. Any tampering with the hash would be detected and rejected.
Both consensus algorithms (POW and POS) have provided a way for the blockchain and cryptocurrencies to remain “trustless,” meaning no third party is necessary to verify or manage the transactions. The below table showcases a detailed comparison of Proof of Stake and Proof of Work.
| Proof of Stake | Proof of Work |
|---|---|
| This is another method of achieving consensus, adopted by algorand blockchain, it is dependent on Validators. | This is the first method of achieving consensus, adopted by bitcoin, it is dependent on Miners |
| Block creators are called Validators | Block creators are called Miners |
| To become a Validator, participants must own coins or tokens. | To become a Miner, participants must purchase equipment and energy. |
| Community provides security due to the amount of tokens staked. | Robust security due to expensive upfront requirement |
| Validators are compensated with transaction fees. | Miners receive block rewards |
| POS is energy efficient. According to the Ethereum Foundation, switching to PoS will result in a network that uses nearly 100% less energy. | Not energy efficient due to the use of sophisticated mining equipments |
Proof of Stake and the Environment
Proof of work consumes significantly more energy than proof of stake. According to data from the Cambridge Center for Alternative Finance, the Bitcoin network alone consumes as much power as an entire country like Malaysia or Sweden.
Part of this is due to the fact that PoW necessitates more advanced equipment. Some Bitcoin miners work with large, complex computing systems.
The proof-of-stake system was created as an alternative to Proof of Work, with considerations for energy usage, environmental impact, and scalability.
Proof of stake requires significantly less effort and no sophisticated equipment. As a result, it is regarded as a more environmentally friendly alternative to proof of work. According to the Ethereum Foundation, switching to PoS will result in a network that uses nearly 100% less energy.
Is Proof of Stake Secure?
Yes! so long as the hacker does not gain access to 51% of the network’s nodes. A 51% attack occurs when a bad actor controls more than 50% of the miners in a network and uses that majority to alter the blockchain in a PoW network. A group or individual would need to own 51% of the staked cryptocurrency in PoS.
Controlling 51% of staked cryptocurrencies is prohibitively expensive. If a 51% attack occurred in Ethereum’s PoS, the network’s honest validators could vote to disregard the altered blockchain and burn the offender(s) who staked ETH. This encourages validators to act in good faith in order to benefit both the cryptocurrency and the network.
Most other PoS security features are not advertised, as doing so may provide an opportunity to circumvent security measures. However, most PoS systems include additional security features that supplement the inherent security of blockchains and PoS mechanisms.
Disclaimer: Please note that this article does not provide investment advice or recommendations. It’s essential to understand that every investment carries inherent risks. Readers are encouraged to conduct their own thorough research before making any financial decisions.
