Proof-of-Stake is a consensus mechanism for validating transactions and generating new blocks on blockchain systems. It’s also a consensus mechanism for authenticating new transaction entries to a blockchain ledger while securing the ledger in the process.
Brief History of Blockchain Consensus Mechanism
Initially, the most commonly used consensus mechanism on Blockchain is Proof-of-Work; It gained popularity due to the growth of Bitcoin and Ethereum blockchains.
Proof-of-Work is a consensus mechanism used to confirm transactions and create new blocks on a blockchain through mining (a process of solving complex mathematical puzzles).
Over time, Proof-of-Work became less effective in validating transactions because of its long mining process. The process was slow to handle the increase in transactions on blockchains due to blockchains’ decentralized nature.
Furthermore, Proof-of-Work is environmentally unfriendly as it consumes too much energy in its mining process. All these shortcomings led to different problems that truncate the growth of blockchain technology.
To solve most of the problems plaguing blockchain technology, developers created an alternative consensus mechanism called Proof-of-Stake to tackle Proof-of-Work problems. Let us go a bit further to unravel the mystery of the Proof-of-Stake consensus mechanism.
Understanding Proof-of-Stake
Proof-of-Stake mode of operation differs from Proof-of-Work; it gives validating power to token owners who staked their tookens to verify transactions and create new blocks on a Blockchain. It selects its validators randomly thereby giving every network participant chances of being selected to validate transactions and create the new block of the blockchain.
Properties of Proof-of-Stake
- Nodes
Nodes are connected devices that run the blockchain software or computers responsible for executing blockchain rules and regulations by running the core software of the Blockchain.
- Voting power
Voting is how the blockchain reaches consensus on its proposals; network participants who stake or delegate their tokens to the Blockchain partake in the voting process.
- Proposals
Proposals are rules, regulations, or changes that blockchain network participants vote on for approval or disapproval to govern the Blockchain.
- Staking
Staking is how network participants delegate their tokens to a blockchain network for support, governance, and authentication of transactions on the blockchain system; the Blockchain rewards the network participant for the act.
- Participant
Participants are the combination of everyone responsible for the running and governance of the blockchain system through staking and voting. We have the validators and the delegators among the participants.
- Developers
Developers are people who write the Blockchain codes; they find solutions to Blockchain's problems, maintain the Blockchain with regulations, and upgrade the Blockchain for optimal performance through codes that are encrypted cryptographically.
How does Proof-of-Stake work
Proof-of-Stake consensus mechanism works through staking, and validators are selected randomly among users who pledge their coins to the Blockchain.
Whenever a new block is needed to be formed by the blockchain network, the algorithm randomly chooses a specific node from the staking pool to publish the next block. After validating the transaction and producing the next block, the blockchains compensate the validator for participating in the running and maintenance of the Blockchain.
Validators can facilitate their chances of being chosen based on their percentage in the total stake. For instance, a node with 40% of the total staked funds has a 40% chance of being chosen to validate the transaction of the new block. However, if the selected validator verifies a transaction wrongly or tries to manipulate the system, such a validator will be punished by slashing.
How to stake on Proof-of-Stake
There are two ways to stake your tokens for bountiful rewards. One is to become a validator and manage a PoS node, but it requires some crypto knowledge and infrastructure maintenance cost.
The second way is to delegate your token to an exchange or validator. You will need to find a reliable validator to delegate your tokens to their nodes; Stakely.io is one of the reliable validators who provides validating services to different blockchains.
How to become a validator
Becoming a validator on Proof-of-Stake might require some level of blockchain knowledge and understanding of how it works; this is one of the reasons why most crypto investors stake by delegating their tokens to professional staking providers like Stakely.io to help handle staking technicalities.
To become a validator, users must stake a certain amount of their tokens to the blockchain system through their nodes; the user must be able to operate the nodes connected to the blockchain network and must be running the latest version of the blockchain software.
However, different Proof-of-Stake blockchains have different rules and amounts of tokens to be staked on their Blockchain to become a validator. For instance, Eth 2.0 requires users to stake 32 ETH to run a validator node on the blockchain.
Real-life use case
Proof-of-Stake is one of the most widely used consensus mechanisms globally; almost every new crypto project operates on the Proof-of-Stake consensus mechanism. Ethereum blockchain, the mother of all smart contract blockchain, the second-largest crypto coin by market cap, is migrating to the Proof-of-Stake consensus mechanism.
The Ethereum migration further certified Proof-of-Stake as one of the best consensus mechanisms to help Blockchain achieve scalability and solve the current problems affecting its growth.
But in case you don’t have up to 32 ETH to stake, there are liquid staking platforms and staking pools through which you can delegate the amount of ETH you want and continue to profit from your tokens thanks to the ETH liquid staking.
What are the pros and cons of Proof-of-Stake?
Proof-of-Stake consensus mechanism aims to tackle the inefficiency of Proof-of-Work like scalability and environmental issues like high energy consumption truncating blockchains growth.
Pros of Proof-of-Stake
- Decentralization
Proof-of-Stake encourages decentralization in blockchain technology; it allows every network participant to partake in the governing process of the Blockchain.
- High transaction speed
Proof-of-Stake reaches consensus faster than Proof-of-Work, which helps the system process transactions more quickly.
- Low transaction fees
Proof-of-Stake blockchains charge lower transaction fees than PoW because transaction processes are shorter and faster.
- Low Energy Consumption
Proof-of-Stake is energy efficient, and it consumes less electricity than Proof-of-Work consensus.
- No special equipment is needed to participate
Proof-of-Stake does not require large mining stations as in PoW to participate in the consensus process, however most networks usually have minimum requirements to ensure good node performance according to the characteristics and functionalities of the network. Generally, a mid-to-high-end PC will be more than sufficient.
Cons of Proof-of-Stake
- Formation of Cartels
Proof-of-Stake allocates voting power based on the number of coins the user has. In most cases, one coin equals one vote; the more coins a user has, the more voting power the user has - this gives the whales on the network power to influence the network, especially when they collide together to control the Blockchain.
- More open to the 51% attack
Access to more than 50% of nodes responsible for the governance of a blockchain can give access to control of the entire Blockchain. Although such an attack looks unrealistic or impossible in more prominent PoS blockchains, however, such an attack is possible on smaller PoS blockchains.
- Test of time
One of the major criticisms against the Proof-of-Stake consensus mechanism is that the technology is new and hasn't stood the test of time. They believe it might fail in the long run.
In conclusion, Proof-of-Stake solves most of the major problems plaguing the Blockchain world. Although the technology is still new and is in its development stage, once it is fully developed, it has the potential to lead Blockchain technology to growth and scalability leading to more acceptance of Blockchain worldwide.
About Stakely
Stakely is a reliable, user-friendly non-custodial staking provider that helps validate and authenticate transactions for Proof-of-Stake and next-generation blockchains. Stakely provides nodes for crypto investors to stake their favorite PoS tokens for passive rewards; while assisting them in sorting out the technical aspect of staking.