What is Proof of Stake (PoS)
Proof of Stake (PoS) is a consensus mechanism used in blockchain networks that allows participants to validate transactions based on the number of coins they hold. Unlike Proof of Work (PoW), which requires miners to solve complex mathematical problems, PoS enables users to create new blocks and validate transactions proportionally to their stake in the network. This method is considered more energy-efficient, as it reduces the need for extensive computational power and lowers the carbon footprint associated with mining.
The concept of PoS was first introduced in 2012 by Sunny King and Scott Nadal in a paper titled "PPCoin: Peer-to-Peer Crypto-Currency with Proof of Stake" as an alternative to PoW. It aims to address some of the scalability and energy consumption issues faced by PoW systems. In a PoS system, the probability of being chosen to validate a block is directly related to the amount of cryptocurrency a user holds and is willing to "stake" as collateral.
What are the types of Proof of Stake?
There are several variations of Proof of Stake, each with unique mechanisms and advantages:
Delegated Proof of Stake (DPoS): In this model, coin holders vote for a small number of delegates who are responsible for validating transactions and maintaining the network. Examples include EOS and TRON.
Leased Proof of Stake (LPoS): Users can lease their coins to a full node, allowing them to participate in the staking process without running their own node. Waves is a notable example of this model.
Bonded Proof of Stake (BPoS): This variation requires users to bond their tokens for a set period to participate in the validation process. Tezos employs this approach to secure its network.
How does Proof of Stake work?
In a Proof of Stake system, validators are selected based on the number of coins they hold and are willing to lock up as a stake. The more coins a participant stakes, the higher their chances of being chosen to validate a block and receive rewards. This incentivizes users to hold and stake their coins, as they are rewarded with transaction fees and newly minted coins for their contributions to network security.
The process begins when a validator is selected to create a new block. The validator checks the transactions to ensure they are valid before adding them to the blockchain. If they act dishonestly or attempt to validate fraudulent transactions, they risk losing their staked coins. This mechanism encourages good behavior and aligns the interests of validators with the health and security of the network.
Where is Proof of Stake used?
Ethereum 2.0: Transitioning from PoW to PoS, Ethereum aims to increase scalability and reduce energy consumption. The total staked ETH reached over 16 million ETH by October 2023.
Cardano: Utilizing a PoS mechanism called Ouroboros, Cardano supports smart contracts and decentralized applications. The network has over 1,000 active stake pools, with more than 70% of the total ADA staked.
Polkadot: This multi-chain network employs a variant of PoS called Nominated Proof of Stake (NPoS), allowing DOT holders to nominate validators. As of October 2023, approximately 50% of DOT supply is staked within the ecosystem.
