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Proof of Stake (PoS): What Is It and How Does It Work?

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Proof of Stake (PoS): What Is It and How Does It Work?

Proof of Stake (PoS) is a cryptocurrency protocol and the main alternative to Proof of Work (PoW). But what is Proof of Stake (PoS)? How does it work? And why do some people prefer PoS to PoW? This guide has everything you need to know about Proof of Stake.

What Is Proof of Stake (PoS)?

Proof of Stake (PoS) is an algorithm that allows a cryptocurrency’s blockchain to achieve distributed consensus without relying on the vast computation required in Proof of Work (PoW).

Theoretically, this protocol has two main advantages over PoW:

  1. It’s more energy efficient.
  2. It’s more immune to centralization.

Background

According to cryptocurrency lore, PoS was first proposed on a crypto forum by a user who goes by QuantumMechanic.

Proof of Stake gained traction in the crypto universe in 2012. That’s when Peercoin (PPC), the first PoS crypto, was created. Typically, the cryptocurrency community cites Sunny King (likely a pseudonym, like Satoshi Nakamoto) as the inventor.

Since then, the protocol has received a growing amount of attention. Typically, people focus on Proof of Stake’s potential to dramatically cut the energy inputs required in traditional Proof of Work protocols.

Most notably, Ethereum (ETH) is considering switching to a PoS protocol.

How It Works

Proof of Stake (PoS): What Is It and How Does It Work?

Proof of Work (PoW) miner vs Proof of Stake (PoS) forger. Shutterstock

Instead of using massive computers like Proof of Work (PoW), Proof of Stake protocol selects users to validate the next block of transactions. And instead of being rewarded with a new bit of currency, they take transaction fees.

How Does It Decides Who Validates a Transaction?

Basically, the algorithm chooses the forger—the computer selected to validate a new block of transactions—based on how much cryptocurrency they own.

So in order to “forge,” a user must own currency. In other words, they must hold an actual stake in the currency whose transactions they want to process. This is why the protocol is called Proof of Stake (PoS).

Steps in PoS Validation

  • The algorithm selects the next forger based on their stake in the currency.
  • The forger then processes the next block of transactions.
  • When they’ve completed the process, the network adds the data to the block.
  • The forger takes the transaction fees.

Introducing Randomization

How does PoS avoid manipulation? Theoretically, whoever owns the most currency would pull more weight in such a system. This means that the protocol is more likely to select richer community members to complete the next block.

As a result, the richer would just keep getting richer. This would centralize the entire system.

Proof of Stake developers have come up with a number of workarounds. The most important one is randomization.

Randomized Block Selection

This approach uses an algorithm that looks for the user with the lowest hash value along with size of stake. That person can then forge the next block of data.

Coin Age-Based Selection

In this approach, it’s not just how much stake a person has, but how long they’ve held that stake.

To be selected in PoS, a user must hold their currency for at least 30 days. The algorithm places a higher priority on stakes that have been held longer. To avoid manipulation, there’s a cap on priority that kicks in at 90 days.

As soon as a user is selected to forge a block of data, their stake age starts over at zero. Essentially, the network bumps them back to the bottom of the waiting list.

Proof of Stake (PoS): What Is It and How Does It Work?

Proof of Stake (PoS) protocol. Shutterstock

Advantages

  • PoS protocols are much more energy efficient since they eliminate the need for computational-intensive mining.
  • Proof of Stake incentives security. Since all forgers own an actual stake in the currency, there is a built-in incentive to keep things secure, valid, and above board.
  • PoS could encourage increased decentralization because there is a lower barrier to entry. In other words, forgers don’t have to compete with massive Bitcoin (BTC) mining operations with much more computational power.

Disadvantages

  • Making decisions based on stake means that those with larger stakes are automatically at an advantage in PoS.
  • Some critics have said that it could result in the “nothing at stake” problem. Essentially, without intensive work required, some block generators could be incentivized to verify multiple blockchain histories. This could theoretically destroy consensus.

Is Proof of Stake the Future of Crypto?

Will Proof of Stake replace Proof of Work?

Many in the cryptocurrency community see Proof of Stake as an environmentally friendly, more decentralized alternative to PoW, the original protocol. Others worry that PoS disincentivizes consensus and unfairly rewards the rich.

The future of PoS adoption could come down to Ethereum (ETH). If the blockchain figures out how to implement it in a way that doesn’t compromise security or democracy, it would encourage wider adoption.