What is Proof of Stake & How Does Confirmation Work in PoS?

August 4, 2022

Table of Contents

Introduction

As on 4 August, about a month and a half away from the impending Ethereum Merge – if you are a crypto novice, you might be hearing words like proof-of-work and proof-of-stake being thrown around a lot. Or you could be hearing PoW and PoS. To clear your confusion – proof-of-work is abbreviated as PoW while PoS is the abbreviation of proof-of-stake. This are essentially two of the most popular kinds of ‘consensus mechanisms’ used by most blockchain networks in the world

Before we get into the nitty gritty of what proof-of-stake exactly is, let us first understand what a consensus mechanism is. According to definitions, a consensus mechanism is nothing but a fault-tolerant mechanism that is used in computer and blockchain systems to achieve a sort of agreement on a single data value on the network among distributed processes – such as cryptos. It is thus very useful in record-keeping, something that is crucial in a blockchain system.

Simply speaking, in the world of crypto and blockchain – a consensus mechanism is the way means of which new transactions are verified on the distributed ledger.

So proof-of-stake (PoS) is essentially a type of consensus mechanism that is used to verify new transactions happening over the blockchain network. Since blockchain lack any centralised authority governing the system – PoS is one of the methods used to ensure that every data saved on the network is valid.

The only place PoS differs from PoW is in PoS, there is a mechanism which chooses which participants on the network get to handle this task – which has a lucrative benefit to it too. Those who get chosen to complete the transaction – they get rewarded with a newly mined crypto if they accurately validate the new data and don’t cheat the system.

The PoW mechanism works in a similar way with one slight difference – the code doesn’t choose a particular participant to validate the data, rather whoever is able to quickly solve a complex mathematical complication is gets the benefit of validating the data.

Thus, while PoW is considered as a more decentralised way of performing the consensus mechanism functions, it consumes a tremendous amount of energy as every ‘miner’ which is connected to the network will try to compete with their computing power to solve the problem and out of them only one will get it. While on the other hand, PoS eliminates the entire competition factor and directly chooses which ‘validator’ who performs the function – thus cutting the energy consumption by over 99%.

Miner is a term specific to PoW, and refer to those participants who compete to validate the transaction on the blockchain and hence be able to ‘mine’ the coin. While, validator is the term specific to PoS – and refer to those who get the chance of validating the transaction based on how much that have staked on the network.

But this functionality in a proof-of-stake consensus mechanism is achieved by something called ‘staking’.

Additional Read: Ethereum Merge Update

What Is Staking?

So to enable the system to choose a validator out of the hundreds of, a system of staking is adopted by the proof-of-stake consensus – hence the name. It is the process whereby participants agree to lock up an amount of the crypto in exchange for a change to validate new blocks of data that is to be added to a blockchain. These validators or ‘stakers’ – put their cryptos in a smart contract that is held on the blockchain itself.

Understanding Proof-of-Stake

So the proof-of-stake model allows owners of a crypto to essentially ‘stake’ their coins and hence be able to create their own validator nodes. As mentioned before, staking is when you pledge your coins to a smart contract on the blockchain, and thus become eligible to verify transactions and get rewarded for it.

It also provides for a measure of flexibility too – despite the fact that your coins are locked up once staked – you can un-stake them whenever you feel the need to trade them or anything else.

So the process that ensues is that when a block of transactions are ready to be processed, the crypto proof-of-stake protocol will choose a validator node to review the block. It is now the validator’s job to check whether the transactions in the block are accurate – if so, the block is added to the blockchain and they validators receive crypto rewards for their work. On the other hand if the validator proposes adding a block with inaccurate information, then that person stands to lose some of their staked holdings as penalty.

Additional Read: Bitcoin vs Ethereum

How Does Proof-of-Stake Work?

Let’s take an example of Cardano to understand how the PoS system works – one of the biggest cryptos today which uses proof-of-stake consensus mechanism. Any person who own ADA in their holdings can set up their own validator node. When the network is ready with a block of transactions to be verified, its Ouroboros protocol selects a validator, who then checks the block, and adds it to the blockchain and receives a rewards for the job.

Mining Power in Proof-of-Stake

While in a proof-of-work consensus mechanism, mining power comes from how much of computing power a miner commands, in the case of proof-of-stake, mining power comes from how much a validator have actually staked onto the smart contract. Thus, participants who stake more coins are more likely to be chosen to add new blocks.

Different proof-os-stake protocols have different rules based on which it chooses its validators. Typically, there’s an element of randomness involved in the selection process, however it largely a combination of different factors such as how much they have staked, or how long they have been staking their coins for.

So technically speaking, anyone staking any amount of coins can be chosen as a validator, but the odds are relatively low if you have staked coins that amounts to a small percentage of the total amount staked. If your coins make up 0.5% of the total amount staked to the smart contract, then the likelihood of you getting chosen as the validator is about 0.5%.

This is where typically staking pools come in. It is quite similar to the function of a mining pool, with the only difference being you are staking coins to the pool instead of contributing with computing power to a mining pool. This is done so as to better their chances of winning new blocks to verify on the blockchain network. In the system, there is an owner that sets up the validator node and rewards are distributed amongst the participants based on how much they have staked into the pools after a cut that is kept by the owner of the pool.

How Is Proof-of-Stake Different From Proof-of-Work?

In short, there are a few fundamental differences that set PoS and PoW apart from each other. All these differences have been enumerated in the explanation above, but here are the differences in a bulleted manner:

PoW is the first generation of consensus mechanism that was born with the birth of Bitcoin, while PoS is the next generation of a consensus mechanism and some of the biggest networks employing this method include Cardano (ADA) and Algorand (ALGO). Even Ethereum, the largest smart contract blockchain out there is slated to transition from PoW to PoS.
PoW involves competing to solve a complex mathematical problem to get the chance to verify the block while PoS works on the principle of staking.
Due to the difference in principles – PoW uses a lot more energy to do verify one block, while PoS is able to do that same function at a tiny fraction of what PoW uses.
PoW is a much slower process due to the way it functions while PoS is faster than PoW in verifying transactions by an order of magnitude, which is also due to the way it performs the consensus

Read more on: Proof of Stake vs Proof of Work

Ethereum Shifting from PoW to PoS

Currently, Ethereum – the largest smart contract capable blockchain network is undergoing a process shift from the slow and energy heavy proof-of-work consensus mechanism on its network to a fast and energy efficient proof-of-stake mechanism. This has been long awaited by the Ethereum community due to a variety of reasons but has been taking quite some time before the engineers implement the final PoS Beacon Chain onto the Ethereum mainnet. This process is being termed as the Ethereum Merge – where the PoS enabled Beacon Chain would be merged into the mainnet. This transition is expected to happen on towards the third week of September 2022.

The reasons why this shift is beneficial is:

Being the largest smart contract capable blockchain network – this move would bring about a massive increase in the speed of processing transactions on the chain, thus making the Ethereum experience more quick and efficient
Also, being the largest PoW based smart contract blockchain – it consumes a huge amount of energy too – thus a shift would cut down the global energy consumption by the Ethereum network by 99.95% (according or Ethereum.org)
Ethereum is still the largest, but a lot of newer and more efficient blockchains are quickly catching up with it, hence this move would serve in keeping Ethereum as the leader in the space

Pros & Cons of Proof of Stake in Crypto

PROS	CONS
Highly energy efficient as compared to PoW	Not as proven in terms of network security as PoW
Dramatically faster in processing transactions than PoW	Validators with large amount of coins staked can exert influence on verification
Doesn’t require special equipment like ASIC chips required for mining in PoW	Coins in PoW need to be locked up in the smart contract and may have a lock-in time

Which Blockchains Use Proof-of-Stake (PoS)?

A number of industry leading blockchain networks in the crypto space today use the proof-of-stake consensus mechanism. Some of the biggest names include Cardano (ADA), Algorand (ALGO), Avalanche (AVAX), Polkadot (DOT), Binance Smart Chain (BSC) and a bunch of others.

FAQs

What Is Proof-of-Stake vs. Proof-of-Work?

These are two different consensus mechanisms employed by different blockchain networks and that works on two distinct principles - in PoW 'miners' compete to get the opportunity to verify and get rewarded while in PoS, 'validators' get selected based on their 'stake' and then get rewarded.

Can Bitcoin Be Converted to Proof-of-Stake?

Nothing can be ruled out as impossible however, the chances of Bitcoin being converted to the PoS mechanism will remain extremely low. This is because this change would force existing miners on the Bitcoin network to adopt a fresh new mechanism that will make their investments in computational hardware, defunct overnight and also the rewards would be broken down, thus less in amount to go around.

Which Cryptos Use Proof of Stake?

How does Ethereum's proof-of-stake work?

Ethereum is still working on a PoW consensus mechanism but is slated to shift to PoS sometime in the middle of September 2022.

Why is Ethereum shifting from PoW to PoS?

Ethereum is moving from PoW to PoS due to a number of reasons ranging from faster transaction speeds to much lower energy consumptions by the network as a whole when compared to PoW. Also it is facing increased competition from smaller altcoins which are eating into its market dominance.

Is proof-of-stake better than proof-of-work?

PoS isn't a hundred percent foolproof and and neither is PoW. Both have their set of benefits and there are some things about PoS that make it better than PoW like speed, scalability and lower energy consumption.

Conclusion

So, ever since the birth of Bitcoin, the way blocks are added in a blockchain network have changed significantly. We don’t need to rely simply on computational power to general crypto consensus – rather a sophisticated system of staking is PoS enables blockchains to be much faster, more scalable and consume a very small fraction of the energy PoW consumes. So thanks to all these factors, PoW is quickly going out of fashion and seems like PoS is here to stay.