Proof of Stake is the second most used consensus algorithm used in cryptocurrencies today.
But what is Proof of Stake?
Proof of Stake systems have the same purpose of validating transactions and achieving consensus as Proof of Work (PoW), however the process is quite different from PoW systems.
With Proof of Stake, there is no mathematical puzzle, instead, the creator of a new block is chosen automatically in a deterministic way, based on their stake. The stake is how many coins one possesses (and in some cases: is actively staking).
The people that own the coins are called ‘stakers’. The larger the amount of coins one is staking and the longer the duration of the stake, the better are the chances of the staker to get transaction validation responsibility.
For example, if one person were to stake 10 coins and another person to stake 50 coins, the person staking 50 coins would be 5 times more likely to be chosen as the next block validator. The validators lock up some of their coins as a stake in the ecosystem. Following that, the validators bet on the blocks that they feel will be added next to the chain. When the block gets added, the validators get a block reward in proportion to their stake.
A key advantage of the Proof of Stake system is high energy efficiency. By cutting out the energy-intensive mining process, PoS proves to be a much greener option compared to Proof of Work. Additionally, the economic incentives provided by Proof of Stake systems may do a better job of promoting network health. Under a Proof of Work system, a miner could potentially own zero of the coins they are mining, seeking only to maximize their own profits in the mining operation itself. In a Proof of Stake system on the other hand, validators must own and support the currency they are verifying.
The scalability in the PoS protocol is also enhanced since there is no need for all the participants in the network to be involved in the process of transaction validation.
PoS / PoW comparison
Both of these blockchain consensus algorithms have their own strengths and weaknesses.
PoW is well-tested and used in many cryptocurrency projects (most prominently – of course – Bitcoin). DDoS attacks on a blockchain employing this algorithm are very difficult with today’s computing technology. However, the high energy cost, increased strain on the environment, associated adverse media coverage, increasing centralization of mining operations, and low transaction throughput will likely make it unviable in the long run. Communities are increasingly concerned about high energy costs, especially on Bitcoin mining. More info about POW can be found here: https://en.wikipedia.org/wiki/Proof_of_work
Thanks to the PoS system, validators don’t have to use their computing power, as the only factors that influence their chances are the total number of their staked coins and the current complexity of the network.
As a result, Proof of Stake systems require a mere fraction of the energy of their PoW alternatives to run. The lower energy costs also make the role of validating more accessible to most people, whereas the role of mining (big coins) is becoming increasingly reserved for large-scale operations.
Another important point is centralization/decentralization, visualized in the image below.
Image from https://blockgeeks.com
An increasing concern with blockchain networks utilizing Proof of Work is the risk of centralization. If one looks at Bitcoin, we can clearly see that the role of mining in Proof of Work systems has become increasingly reserved for large-scale operations. Control of blockchain networks is slowly moving from the community at large to fewer and fewer hands, contrary to the decentralized idea of cryptocurrencies itself.
Proof of Stake systems therefore potentially provides a fairer solution. The amount of network control a participant can gain in a Proof of Stake system is directly proportional to how much they invest. If one participant invests ten times more than another participant, they will receive ten times the amount of control. On the contrary, under Proof of Work systems, if a miner invests 10 times the amount of money into equipment than another, they will actually receive more than 10 times the computational power (visualized below). This comes as a result of bulk purchasing deals and the increased efficiency of high-end equipment, as well as the different costs for electricity around the world. As a result, it is becoming increasingly less profitable and more difficult for individuals to compete against large mining farms.
On the other hand, PoS requires a definite buy-in from newcomers, while most PoW mining can be done with hardware already available to the consumer.
Reducing centralization of the entities in control of validating transactions is fundamental to the distributed architecture of a blockchain network; this is why the consensus mechanism plays such an integral role. A properly functioning consensus mechanism is necessary in order to maintain the trustless, immutable, and distributed nature of any blockchain network.
A switch from PoW to PoS therefore normally provides the following benefits:
- Energy savings
- More scalable
- Increased decentralization
Noirs switch from PoW to PoS is scheduled for Q4 2019.