Proof of Stake is a popular alternative consensus mechanism to Proof of Work. Validators must stake coins instead of using computing power to validate transactions. It substantially reduces the quantity of energy required. As a result, proof of Stake enhances decentralisation, security, and scalability.
However, without access to cryptocurrency, Proof of Stake may be more challenging to achieve. A 51% attack is also possible with low-market-cap blockchains. Because Proof of Stake is so adaptable, it has many variations for blockchains and uses cases.
The Proof of Stake consensus algorithm was first proposed on the Bitcointalk forum in 2011. It was presented as a solution to the problems with Proof of Work. While both aim to achieve blockchain consensus, their approaches are quite different. Participants only need to prove they have staked coins rather than providing computationally intensive proof.
How does Proof of Stake work?
The Proof Of Stake algorithm employs a pseudo-random election process to select validators from a group of nodes. The system uses several factors, including staking age, randomization, and the wealth of the node.
Blocks are 'forged' rather than mined in Proof of Stake systems. Most Proof of Stake cryptocurrencies begins with a supply of 'pre-forged' coins to allow nodes to start as soon as possible.
Users participating in the forging process must stake a certain amount of coins in the network. The size of the stakes determines a node's chances of being chosen as the next validator - the more significant the stake, the greater the opportunities. Unique methods are used in the selection process to favour nodes other than the richest in the network. Randomised Block Selection and Coin Age Selection are the most commonly used methods.
Randomised Block Selection
The Randomised Block Selection method chooses validators by looking for nodes with the lowest hash value and the highest stake. Because stake sizes are public, other nodes can usually predict the next forger.
Coin Age Selection
The Coin Age Selection technique primarily chooses nodes based on how long the tokens were staked. Coin age is calculated by multiplying the number of days the coins were staked by the number of staked coins.
Once a node has cast a block, its coin age gets reset to zero, and it should wait for a certain length so that you can forge every other block - this prevents large stake nodes from dominating the blockchain.
Which blockchains use Proof of Stake?
Most blockchains post-Ethereum use Proof of Stake consensus mechanisms.
Blockchain networks that use Proof of Stake or some form of it include:
1. BNB Chain
2. BNB Smart Chain
Advantages of Proof of Stake (PoS)
Proof of Stake has many distinct advantages over Proof of Work. For this reason, newer blockchains almost always use Proof of Stake. Benefits include:
Adaptability: As user requirements and blockchains change, the proof-of-stake can change as well. It's easy to see this with the plethora of customizations available. The mechanism is versatile and easily adaptable to most blockchain use cases.
Decentralisation: More users are encouraged to run nodes as it is more cost-effective. This incentive and the randomisation process also make the network more decentralised. Although there are stake pools, there is a much higher chance that a person will successfully fake a block in Proof of Stake. In general, this reduces the need for participation groups.
Energy Efficient: Proof of Stake is incredibly energy efficient compared to Proof of Work. The cost of participation is based on the economic cost of wagering coins rather than the computational cost of solving puzzles. This mechanism results in a significant reduction in the amount of energy required to run the consensus mechanism.
Scalability: Because Proof of Stake does not rely on physical machines to generate consensus, is it more scalable? There is no need for large mining farms or power supplies. Adding more validators to the network is cheaper, easier, and more accessible.
Security: Staking is a financial motivator to keep the validator from processing fraudulent transactions. If the network detects a fraudulent transaction, the validator loses part of its stake and its right to future participation. So as long as the stake is higher than the reward, the validator will lose more coins than they would gain from the fraudulent activity.
To effectively control the network and approve fraudulent transactions, a node must own a majority stake in the network, also known as a 51% attack. Depending on the value of a cryptocurrency, gaining control of the network can be almost impossible, as you would need to acquire 51% of the circulating supply.
Disadvantages of Proof of Stake (PoS)
Although Proof of Stake has many benefits as compared to Proof of Work, it nonetheless has a few weaknesses:
Forking: With a fashionable Proof of Stake mechanism, there may be no disincentive for mining each facet of a fork. Under Proof of Work, mining each element will cause a waste of energy. With Proof of Stake, the fee is an awful lot less, which means that humans can "bet" on each facet of a fork.
Accessibility: To start staking, you will want a blockchain's local token supply. Then, you can buy the token through trade or a different method. Depending on the quantity required, you could want good-sised funding to start staking effectively.
With Proof of Work, you could purchase a reasonably-priced mining system or maybe lease it. With this, you could be a part of a pool and begin validating and earning quickly.
51% Attack: While Proof of Work is vulnerable to 51% of attacks, Proof of Stake makes them much more accessible. For example, suppose the price of a token falls or the blockchain has a low market capitalization. In that case, buying more than 50% of the tokens and controlling the network can be theoretically inexpensive.
Whereas both consensus mechanisms have distinct characteristics, the most glaring difference is how the two agents add blocks to the blockchain. Whereas Proof of Stake (POS) uses randomly selected validators to confirm transactions and create new blocks, Proof of Work (POW) uses a competitive validation method to confirm transactions and add new blocks to the blockchain.