August 23, 2022
Victoria Rudi

What’s Proof of Stake?

Similar to Proof of Work, Proof of Stake is a Consensus Mechanism.

→ What’s a Consensus Mechanism?

As Chris Berg, Principal Research Fellow at RMIT University, notes, the Consensus Mechanism is the key invention of blockchain technology.

According to Berg: “All blockchains need some way to come to an agreement about what the contents of their shared ledger is. All blockchains need a way for the network to agree which transactions to add and in which order.”

In other words, the Consensus Mechanism is a system used to verify transactions and maintain the security of a blockchain network.

Achieving an agreement is easy in a centralized system, as the central authority:

  • Holds a master copy of the ledger
  • Notifies everyone of changes to the ledger
  • Ensures that everyone is keeping an accurate copy

A Consensus Mechanism is how you come to an agreement without a central authority.

→ What is Proof of Stake?

As with Proof of Work, Proof of Stake is used to attain consensus and keep the underlying blockchain secure. However, compared to Proof of Work, Proof of Stake requires less work and energy to validate blocks.

In Proof of Stake, there’s no race between forgers to validate transactions. Instead, forgers have to participate in a lucky draw, and the blockchain determines the winner. The winner then validates the transaction and gets a small reward for the energy consumption.

Quick note: The Proof of Work model awards a block each time an individual validates a transaction. The Proof of Stake system, though, allows generating revenue by earning simple transaction fees for each validation. In other words, there’s no block reward in Proof of Stake, so technically, the validators aren’t mining. That’s why they’re not called “miners,” but “forgers.”

To avoid fraud, forgers can volunteer in the lucky draw only by staking some of their own cryptocurrency into storage. If the forgers cheat, they’re penalized, and some of their staked coins are taken away by the entity that spots the fraud. Apart from losing their money, the validators will lose the right to participate as a forger.

Also, it’s worth noting that the more crypto forgers stake, the higher the chances they’ll be winners.

→ Features of Proof of Stake

The Proof of Stake system includes fundamental features, such as:

  • Fixed number of coins: Only a finite number of coins circulate through the network at any given time. It’s impossible to create new coins. The network either starts with a limited number of coins or with Proof of Work to bring coins into the network and then switches to Proof of Stake.
  • Transaction fees as a reward for forgers: Each transaction has a fee attached to it. This is gathered and given to the entity creating the new block. The entity loses the transaction fee and the stake if the forged block is proved to be erroneous or fraudulent. This is known as “slashing.”
  • The impossibility of the 51% attack: The 51% attack is impractical because it requires the attacker to own 51% of the total coins in the network, which is highly expensive. In other words, the network attack requires too many resources, making it costly and impractical.

It’s also worth noting that Proof of Stake is considered to be energy efficient, as the forgers don’t need high computational power to compete and validate transitions.

→ The Merge

“The Merge” is a world-expected event that will probably happen in the third or fourth quarter of 2022. The Merge involves transitioning the entire Ethereum network to a different consensus mechanism: from Proof of Work to Proof of Stake. This transition promises to set the stage for future scaling upgrades. Also, the Merge will reduce Ethereum’s energy consumption by 99,95%.