Due to the proof of work’s limitations and mining’s high energy consumption, developer Sunny King made an alternative consensus mechanism in the form of the proof of stake. It promised to improve upon the scalability issues that PoW had and use 99% less energy.
However, how does proof of stake work? Is it successful in attaining its goals? To find out the answer to these questions keep on reading to know everything about it.
What is the Proof-of-stake consensus mechanism?
In a nutshell, proof-of-stake is a cryptocurrency consensus mechanism used to process and validate transactions, which will then add a new block to a blockchain. This makes the database, which in this case is a blockchain, more secure since it validates every entry added to it.
Developed not long after the Proof-of-Work (PoW) mechanism, Proof-of-Stake (PoS) was introduced to answer the scalability issues that Bitcoin and Ethereum were facing back then.
Other factors that played into the mechanism’s inception included the extremely high fees that were being charged in the Ethereum network. This huge upward spike was caused by the increasing fame of DeFi protocols that were powered by the network.
How does proof of stake work?
Compared to the proof-of-work mechanism which involves miners, proof-of-stake uses validators, which are sometimes called stakers, to verify each transaction made on a specific network. These validators won’t be competing to solve cryptic puzzles to verify a transaction but will be chosen randomly instead.
It’s not entirely random since the decision is based on the amount of crypto that a validator holds and is willing to stake. The idea is that the more crypto tokens they stake, the more likely they’ll be chosen to become validators.
After being chosen as validators, they can then verify a transaction and add a block to the blockchain. In return, they’ll be rewarded with a specific amount of freshly minted crypto in exchange for their hard work and contribution to the network.
This task is a huge responsibility since it contributes to maintaining the blockchain network of the cryptocurrency. That’s why the consequences of accidentally verifying fraudulent transactions are extreme with some losing a portion of their stake while others lose all of them.
What is staking?
Staking is done by validators in the proof-of-stake consensus mechanism to be eligible for the validation of new data that will be added to the blockchain. It is done by locking up a specific amount of cryptocurrencies into smart contracts powered by the blockchain network.
Advantages of the proof-of-stake mechanism
Several crypto holders and investors turn to tokens that use the proof-of-stake mechanism because of the advantages they have over those that use proof-of-work. These advantages target different areas of the blockchain network that also benefit their users.
More energy efficient
One of the main things that the proof-of-stake consensus mechanism aimed to improve upon proof-of-work is the amount of energy required. To put things into perspective, mining requires miners to spend thousands of dollars to run and maintain their high-tech rigs.
Millions of KWh of electricity are equal to millions of dollars spent on the bills. As for staking, validators don’t have to spend a fraction of what miners spend on their electricity bills since it uses 99% less energy.
Faster and cheaper transactions
Another thing that Sunny King sought to solve with the introduction of the PoS consensus mechanism was its scalability.
The most popular cryptocurrency that uses PoW is Bitcoin, and one of the challenges that it’s facing is its limited capability of handling numerous transactions in the network. Although it can handle all the transactions, the time it spends can take anywhere between 10 minutes to an hour.
Fortunately, with PoS, users won’t only enjoy the speed, but cheap transactions as well. As for the number of transactions it can process, PoS is much more scalable compared to PoW.
In Ethereum’s upcoming ‘Merge’, the network plans to fully shift its consensus mechanism to proof-of-stake. This move plans to achieve a processing power that can handle a whopping 100,000 transactions per second, which are miles away from Bitcoin’s 3.3 to 7 transactions per second.
It doesn’t require a powerful computer
One reason why several people can’t break into bitcoin mining is because of the expensive computers required to mine/validate transactions. You can’t just build any computer, you need to have a powerful processor and a Graphical Processing Unit (GPU).
With proof-of-stake, the hardware requirements are low, which means that it’s much more accessible to people who’re trying to generate more cryptocurrencies. Modern laptops today are capable of staking cryptocurrencies since this mechanism isn’t that demanding of hardware.
Disadvantages of the proof-of-stake mechanism
No consensus mechanism is perfect and proof-of-stake is no different. While PoS promises impressive features, there are some things about this system that hinders it from reaching its full potential such as:
Lack of decentralisation
Decentralisation is one of the key features of blockchain technology and unfortunately, the proof-of-stake mechanism has a risk of being centralised because of its nodes. The problem comes in when the larger nodes overpower the smaller ones, which inevitably hinders them from participating in the consensus process.
A glaring problem that investors notice with the PoS mechanism is its lack of security as compared to PoW’s robust measures.
The former only requires its validators to hold and stake a large number of tokens to participate. This means that it’s much more breachable since anyone, even people with malicious intent, can take control when they’re randomly selected.
Meanwhile, with the latter, miners are required to spend energy to be eligible for the consensus process.
Is proof-of-stake perfect?
All in all, proof of stake offers several advantages that make the lives of crypto investors easier. From its much-improved scalability to its speedy and cheaper transactions, this consensus mechanism poses various benefits that are simply not present with its proof-of-work counterpart. However, it’s up to you to weigh your option to help you decide on which coins you’re going to invest in.