What is Proof of Stake?

Cryptocurrencies are decentralized and not under any central authority. Using them as a means of payment or storing value would be impossible if there was no way to authenticate or verify transactions made with them, and that’s why consensus mechanisms exist in every blockchain.

The Proof of Stake (PoS) consensus mechanism is among the most popular.

Proof of stake is a consensus mechanism used to validate cryptocurrency transactions by giving crypto stakers the right to check and validate new blocks of transactions before adding them to the blockchain. 

After seeing that bitcoin mining consumed a lot of energy, the Proof of Stake consensus mechanism was created to offer faster, more reliable, cheaper, and more energy-efficient mining and transaction validation. 

Since proof of stake is much more energy-efficient, it has become more popular as attention has turned to the ecological effects of blockchain mining.

Here’s a guide to how it works, its pros and cons, and how it is implemented in cryptocurrencies.

How Proof of Stake Works

The Proof of Stake consensus mechanism allows cryptocurrency owners to stake their crypto assets and create validator nodes. 

By staking, you are pledging your coins to a staking pool to verify transactions on the blockchain. Your coins are locked during the staking period, but in a liquid pool, you can unstake them at any time if you want to trade them.

When a block of transactions needs to be validated, the crypto’s proof-of-stake consensus mechanism will select a validator node to review the block. The validator checks if the transactions in the block are correct. If the transactions are valid, the validator adds the block to the blockchain and receives crypto rewards for their contribution. 

However, if a validator proposes to add a block with incorrect information that doesn’t match the previous block, they can lose some of their staked holdings as a penalty.

For example, let’s look at how this works with Ethereum(ETH), a major cryptocurrency that recently switched from proof of work to the proof of stake consensus mechanism.

If you hold Ethereum, you can stake it and set up your validator node. When a block of transactions needs to be verified on the blockchain, Ethereum’s protocol selects a validator. As a validator, you check the block, add it, and receive Ethereum rewards for your services.

Proof of Stake Vs. Proof of Work

The Proof of Work is the first consensus mechanism and still the exact mechanism used in the Bitcoin network. Through the proof of work consensus, Bitcoin miners can mine Bitcoin by solving complex mathematical computations and earn rewards when they add new blocks of transactions to the blockchain.

However, as Bitcoin mining has become very popular, there are concerns about how environmentally friendly and sustainable it is. Some groups argue that Bitcoin mining consumes energy equivalent to energy consumption in Argentina or other countries.

In Proof-of-Work, miners with more computational power are more likely to add new blocks to the blockchain. This computing power is fueled by electricity. However, the sustainability concerns could not be overlooked, hence the development of the Proof of Stake consensus mechanism.

In proof-of-stake, miners are more likely to add new blocks if they have more money. In other words, proof-of-stake relies on “proof” of how much “stake” users have in the blockchain network. Since proof of stake doesn’t require validators to solve complex equations, it’s a much more eco-friendly way to verify transactions.

The only downside of the Proof of Stake mechanism is that it isn’t as secure as the Proof of Work mechanism.

Crypto Projects Using Proof of Stake Consensus Mechanism

Let’s highlight some of the most popular crypto projects using the Proof of Stake consensus mechanism.

1. Ethereum

On September 15th, 2022, the most ambitious proof-of-stake rollout to date occurred —The Merge, a series of upgrades that transitioned Ethereum from Proof of Work to Proof of Stake. 

Here’s how it works:

Special entities in proof-of-stake, known as “validators,” are given the right to select the next blocks for the Ethereum blockchain.

Validators stake some of their ETH to participate in the proof-of-stake process. Just like miners in proof-of-work, they are rewarded for validating transactions on the blockchain.

Validators are rewarded when:

• They authenticate a new block, meaning they accept it as accurate, saying it follows the rules.
• They “win” a block of transactions in the blockchain.

To ensure some validators don’t attempt to cheat the system, Ethereum’s proof-of-stake has penalties against violators.

If a validator proposes to add a block with a false data history, the protocol slashes a portion of their staked assets. In more severe cases, the validator is banned from the network.

Minor penalties are allotted if the validator is offline for too long.

To become an Ethereum validator, you must stake a minimum of 32 ether, worth roughly $128,000 as of March 2023, to run a validator node.

2. Cardano

Cardano is also built on the PoS consensus mechanism. At the heart of the Cardano ecosystem are stake pools and reliable server nodes through which ADA holders can stake their assets. 

Stake pools ensure everyone regardless of their technical experience and availability can participate in the protocol. These stake pools focus on maintenance and hold all the staked assets in a single entity.

To be registered to a validator node, 500 ADA is required. Beyond that, representing a minimum of 1 ADA would give a validator a small opportunity to validate blocks.

3. Solana

Solana’s proof-of-stake (PoS) method is a consensus mechanism that relies on validators to validate transactions and add new blocks to the blockchain. 

In Solana’s Proof of Stake mechanism, validators are selected based on the amount of Solana tokens (SOL) they have staked, with the highest stakers having a better chance of being chosen to validate a transaction.

However, there are risks involved with staking, such as the possibility of being slashed or losing staked funds in case of a malicious attack. 

Slashing is a penalty system designed in the consensus mechanism to discourage validators from attempting to validate fake transactions or neglecting their responsibilities as validators. If a validator acts maliciously, they can be penalized by having a portion of their staked SOL confiscated.

You can unstake your SOL any time you want. When you unstake your SOL, it becomes available for transfer or sale, but it is also subject to a cooldown period during which it cannot be used for staking. 

The cooldown period is designed to prevent validators from quickly unstaking their SOL in the event of a network attack, which could cause instability and compromise the network’s security.

While no mimum amount of SOL is required to become a validator, you must have a reserve of 0.02685864 SOL coins to participate in the consensus.

4. Avalanche

Following Ethereum’s successful upgrade to Proof of Stake in 2022, ease of PoS operability has become a focus for many EVM-compatible chains. Core is paving the way for user-friendly staking on Avalanche (AVAX), one of the top EVM Layer 1’s available today.

Avalanche is a highly scalable decentralized blockchain network featuring sub-second time-to-finality and high transaction throughput.

Avalanche is capable of processing up to 4,500 transactions per second, depending on the subnet. Avalanche’s Subnet architecture allows the network to scale horizontally by increasing the number of blockchains utilized for processing as opposed to focusing on raising a single chain’s speed.

Subnets are sovereign networks within Avalanche, allowing for tailored blockchain solutions with their own rules and token economics. They offer flexibility, speed, and decentralization, as well as the potential for permissioned or permissionless settings, VM support, and trust-minimized interoperability. 

We believe Subnets represent the next evolution in blockchain technology.

Avalanche utilizes a Proof-of-Stake consensus mechanism, whereby validators must commit a certain amount of AVAX tokens to participate in securing the network. If you stake the minimum amount of AVAX, 2000 AVAX to secure their validator node or delegate their tokens to another node receive rewards generated by the protocol.

Benefits of Proof of Stake

• Energy-efficient.
• Provides fast and inexpensive transaction processing. 
• It doesn’t require special equipment to participate.

Problemsof Proof of Stake

• It’s not as secure as proof of work.
• Validators with large holdings can have excessive influence on transaction verification.
• Some proof-of-stake cryptocurrencies require locking up staked coins for a minimum amount of time.