A Beginner’s Guide to Proof-of-Stake

What are consensus mechanisms?

A consensus is a general agreement toward a set of guidelines, opinions, or principles. Similarly, a consensus mechanism is a protocol that’s a set of rules or policies blockchains adhere to when verifying and validating cryptocurrency transactions.

It ensures each transaction on the blockchain is recorded and every node on the blockchain network has access to a copy containing transactions verified in accordance with the mechanism.

How does proof-of-stake work?

Since a single controlling authority doesn't regulate blockchains, there must be an approach to reach a consensus on the legitimacy of crypto transactions. If not, blockchains could experience malicious behavior, double-spending, and fake transactions.

Blockchains with a PoS consensus mechanism require their nodes to "stake" or "lock up" cryptocurrency for a fixed period. In return, these nodes earn the opportunity to become "validators," which are selected nodes that generate new blocks for the blockchain and receive native cryptocurrency as rewards. Think of it as a lottery: Higher stakes lead to higher chances of being selected as a validator.

The PoS system has a framework that secures the network in case a validator starts acting suspiciously or engages in fraudulent activity. 

How does proof-of-stake secure a network?

PoS consumes less computational power and facilitates increased transactions and processing speeds than PoW, making it a more viable option as a consensus mechanism. PoW-enabled blockchains count on miners to follow protocol and not break consensus laws. 

In theory, PoS strengthens a blockchain's defenses against "51% attacks," a type of hack in which attackers seize control of more than half a blockchain. Hackers in power can impede transactions, double-spend cryptocurrency, and create alternative network copies if captured.

A proof-of-stake system, on the other hand, provides access to validators who lock up cryptocurrency as a security deposit. As a result, hackers can't attack crypto assets or prevent blockchain transactions as they can't access a validator's stake. If users don't abide by the consensus rules, their stake will be forfeited.

PoW lowers the risk of forking as it stops malicious users from spending cryptocurrency twice. To hack a PoS system, hackers must hold more than 50% of the coins. This would be an expensive task for hackers.

Furthermore, the blockchain may punish malicious users trying to attack the blockchain and strip them of their stakes, making all their gains worthless. As a result, a PoS system makes cyberattacks nearly impossible and provides an innovative way to secure the network.

Different types of proof-of-stake systems

PoS is gaining popularity as an appealing consensus mechanism for many blockchain creators and developers in the crypto community. As a result, the consensus mechanism has several iterations that aim to streamline the validator selection procedure and boost blockchain performance, security, and efficiency.

Delegated proof-of-stake

In a delegated proof-of-stake (DPoS) framework, blockchain users have the authority to assign a predetermined number of validators—called witnesses—the responsibility of creating new blocks. This occurs through a voting process where users choose witnesses based on the number of tokens stored in native crypto wallets. Users can replace an ineffectual witness at any point with a different validator.

Leased proof-of-stake

Leased proof-of-stake (LPoS) is a consensus mechanism where users lease cryptocurrency to a specific node that aims to serve as the blockchain's "block producer." Higher stakes enhance a node's chances of being selected to create new blocks and earn rewards. Users can terminate their lease at any stage.

Users with fewer tokens can combine their resources to maximize their chances of winning, as they would otherwise not be permitted to engage in the block-building process in a conventional PoS system.

Pure proof-of-stake

Pure proof-of-stake (PPoS) is used by Algorand, a blockchain specializing in dApps (decentralized applications). In contrast to most PoS systems, this protocol lacks an internal penalty mechanism to thwart fraudulent node behavior or potential security vulnerabilities and algorithm flaws. Instead, PPoS offers minimal stake criteria, which allows any willing participants to join and secure the blockchain.

Proof-of-importance

Standard PoS protocols only consider the amount of cryptocurrency staked when selecting a validator. On the other hand, a proof-of-importance (PoI) consensus mechanism aims to evaluate user contributions more comprehensively rather than just focusing on capital. PoI considers various factors when selecting a node.

Liquid proof-of-stake

Blockchains that employ liquid proof-of-stake (LPoS) allow users to lend their validator privileges and voting rights to other participants without giving up control of their cryptocurrency. 

LPoS shares some similarities with DPoS; however, users in LPoS networks have the freedom to decide if they want to stake their own tokens or assign validator status to other users via tokenized validation rights. In contrast to DPoS—which has a set validator count—LPoS has a variable amount of active validators.

Proof-of-validation

Proof-of-validation (PoV) protocol’s blockchains use staked validator nodes to reach a consensus, where each node maintains a record of transactions occurring on the blockchain. The mechanism identifies a node's public key and crypto wallet to verify the amount of cryptocurrency it holds. Users can then stake their cryptocurrency within validator nodes. Each validator's staked token quantity affects the number of votes a particular validator has.

When a group of validators representing at least two-thirds of the blockchain's overall voting power submits a vote to generate the next block, the block is considered verified.

Hybrid proof-of-stake

While most PoS consensus mechanisms purposefully stray away from PoW protocols, several hybrid proof-of-stake (HPoS) consensus mechanisms combine PoW and PoS features to fuel blockchain activities.

HPoS systems often depend on PoW miners to create new blocks containing new cryptocurrencies. These blocks are subsequently forwarded to PoS validators, who then decide whether or not the new blocks should be added to the blockchain through voting.

Proof-of-work vs. proof-of-stake

Before comparing PoS with PoW, let’s understand what a PoW consensus mechanism is.

PoW requires all nodes to use their own computers to validate blockchain transactions. Miners generate new blocks by solving complex mathematical problems using vast amounts of electricity and advanced computational power. Miners compete to be the first to solve these problems to be able to validate new blocks and receive block rewards in the form of new coins. Bitcoin (BTC), the world’s most popular cryptocurrency, uses a PoW consensus mechanism.

PoS and PoW aim to achieve a consensus on their respective blockchains, albeit both use different methods. PoS allows validators to verify transactions, but they can only participate by staking a certain amount of native cryptocurrency and receive transaction fees as a reward. PoW, on the other hand, rewards miners who solve complex equations with new blocks and native cryptocurrencies.

PoS doesn’t require the advanced hardware PoW needs and uses less energy, making it a greener option. In contrast, PoW is energy-intensive and consumes massive amounts of electricity and power, significantly impacting the environment.

The following table sums up the differences between PoS and PoW:

Benefits

1. PoS is more environmentally friendly than PoW.
2. PoS processes transactions faster. For example, Ethereum currently processes 30 transactions per second, while Ethereum 2.0 processes 100,000 with its PoS protocol. 
3. Being a validator is more accessible than being a miner as you need digital assets to stake instead of machinery and electricity.
4. PoS systems offer more scalability solutions than PoW. 

Drawbacks

1. Users can “buy” control as those with more considerable crypto assets have higher chances of being chosen as validators.
2. PoS is deemed more secure than PoW in theory; however, that’s yet to be proven in real-world scenarios.
3. PoS requires users to stake assets for a fixed period if they want to become validators, leaving their assets inaccessible for that time.

Most popular proof-of-stake blockchains

PoS is gaining popularity in the realm of cryptocurrencies. More than 260 cryptocurrencies employ a PoS consensus mechanism. Here are the largest proof-of-stake cryptocurrencies by market cap:

1. Binance (BNB)
2. Cardano (ADA)
3. Solana (SOL)
4. Polkadot (DOT)
5. Avalanche (AVAX)
6. NEAR Protocol (NEAR)
7. Cosmos (ATOM)
8. Flow (FLOW)
9. Algorand (ALGO)
10. Elrond (EGLD)

Wrapping up

PoS offers an alternative to traditional PoW consensus mechanisms and improves it in multiple ways. However, it still isn’t a perfect system. It sounds great in theory, but its practicality and real-world performance are yet to be tested.

PoS is just one of many consensus mechanisms. It isn’t better than other protocols; it simply offers another option for developers and creators who want to improve blockchain performance and streamline crypto assets to meet the dynamic demands of crypto users worldwide.

Each system has its own advantages and disadvantages, with new cryptocurrencies and networks being introduced each day. One such cryptocurrency is Worldcoin. At Worldcoin, we offer a significant advantage, i.e., guaranteed privacy. We aim to increase crypto participation while maintaining our users' privacy and anonymity. To do this, we’re offering each individual on the planet a free share of our cryptocurrency. To know more, subscribe to our blog.