Proof-of-stake (PoS) validation mechanisms were developed as a partial solution to the critiques of PoW mining, such as PoW’s large energy footprint, high entry barriers and geographical concentration. In the section on PoW, we outlined how participants in the Bitcoin network agree on who gets to propose blocks (those solving the PoW puzzle) and how they come to a consensus about which blocks get accepted (those extending the longest chain).
There are other algorithms that use a different way of proposing and agreeing on blocks, respectively. In theory, a protocol could simply select a random node for proposing each new block. However, this is where the problem of identities comes into play. On the internet, identities are hard to verify. For example, one person can pretend to be any number of people by running multiple instances of the same program to gain a disproportionally large influence. For a blockchain to remain secure, it must have a mechanism to prevent a malicious user or group from cheating or taking over the majority of validation nodes. One possible solution to this problem is to make it more costly for a single person to masquerade as hundreds or thousands of identities - a mechanism called “sybil resistance”. As outlined, PoW does this by requiring miners to solve a hard computer puzzle for which they need to purchase large quantities of expensive hardware in that use large amounts of energy.
In contrast, PoS protocols use a radically different sybil-resistance mechanism. Rather than relying on a computationally intensive process, PoS uses the networks’ native tokens to select block proposers. PoS relies on the idea of selecting block proposers based on how much money they are willing to lock in for this purpose, i.e. the proportion of tokens are willing to risk for supporting the system. The more tokens someone is willing to risk, the higher the chances of being selected to propose the next block. Staking is the process of committing a blockchain’s native token to become a validator. A validator runs software that confirms transactions and when chosen, creates a new block and receives transaction fees and new tokens as a reward. In PoS blockchain protocols, a penalty mechanism called slashing is used to discourage validator misbehavior and downtime. While the specifics of slashing vary among each protocol, it usually involves the loss of a predefined percentage of a validator’s locked tokens if the validator tries cheating the system. PoS systems offer a more environmentally friendly alternative to existing PoW mechanisms. Instead of wasting considerable amounts of electricity competing for the right to propose the next block, PoS allows users to substitute electricity with capital. This greatly reduces the amount of energy needed to power a blockchain as no computationally intensive tasks have to solved.
Photo by Stanislav Kondratiev