What is Proof of Stake, and How Does it Differ From Proof of Work?

Mining cryptocurrencies like Bitcoin, Litecoin, and Dogecoin requires intensive energy use. This is because they employ a consensus mechanism known as proof of work (PoW). But crypto mining no longer has to consume a lot of energy, thanks to another consensus algorithm called proof of stake (PoS), which several top cryptocurrencies adopt.

This article explains all you need to know about the PoS consensus mechanism and how it differs from PoW.

Consensus Mechanism Defined

All public blockchains can be considered databases. Unlike in the traditional finance sector, where companies limit access to their databases, blockchains allow anyone to access their databases, thus decentralizing control, which makes the networks less vulnerable to attacks.

To decentralize control, blockchains adopt consensus mechanisms, which give parties known as miners or validators the ability to add and verify transactions on the networks. Anyone can become a miner or a validator so long as they have the software for running nodes.

Consensus mechanisms help prevent the 51% attacks, which happen when a particular node operator accumulates over half of the hashing power in a blockchain and then uses it to control the network.

Understanding Proof of Work

In order to prevent users from spending funds twice, blockchains like Bitcoin use the proof of work consensus mechanism, which, as mentioned earlier, consumes massive energy. In PoW blockchains, miners battle with each other to solve tough puzzles, and one who finds the answers first is given the right to add transaction blocks on the network.

The proof of work consensus algorithm was created by Bitcoin developer Satoshi Nakamoto. It was later adopted by Ethereum but abandoned for proof of stake in 2022 as environmentalists criticized PoW cryptocurrencies for polluting the environment.

Understanding Proof of Stake

PoS seeks to achieve a similar outcome as PoW: To securely add and verify crypto transactions on blockchains. Unlike PoW miners, who have to purchase expensive and highly energy-consuming equipment to mine cryptocurrencies, PoS validators are only required to stake a specified amount of tokens, which cannot be spent. Both validators and miners earn rewards for their participation.

Here are some of the benefits of proof of stake as highlighted by the Ethereum Foundation:

• Considering that rewards are not distributed to validators based on their computing power, they do not need to possess expensive hardware.
• Since PoS lowers hardware requirements, it is more energy-efficient than PoW.
• PoS also lowers the entry barrier for participating in the transaction verification process, making blockchains more decentralized.

How Do PoS Blockchains Select Validators?

Validators on PoS networks are picked randomly to add and verify transaction blocks. Moreover, PoS blockchains group the validators into committees every day. So, when network users initiate transactions, these blockchains will select some committees to add the transactions to the network and others to verify them. When the transactions are processed, these committees are given rewards. Note that validators who attempt to attack a blockchain risk losing their stake forever.

The proof of stake consensus mechanism is intended to make it impossible for anyone to launch an attack on the PoS networks. Blockchain company ConsenSys says there is a considerably low probability that an attacker who controls 1/3 of all validators in a particular blockchain would manage to control 2/3 of the validators in a certain committee to execute a successful attack.

The Future of PoS Consensus Mechanism

Besides Ethereum, there are several other leading cryptocurrencies that use the PoS consensus mechanism. Some of them include Tezos, Cardano, EOS, Cosmos, Algorand, and Polkadot.

In recent months, staking of the abovementioned cryptocurrencies on crypto exchanges has come under regulatory scrutiny, with the US Securities and Exchange Commission claiming that staking services offered by trading platforms are unlicensed securities offerings.

Nonetheless, there is a chance we could see more blockchains ditch PoW for PoS in the coming years as criticism over the former’s intensive energy use continues to grow.