Proof of Stake

The Proof-of-Stake mechanism in a blockchain is used to create new blocks and process transactions. A consensus mechanism validates and maintains the security of entries in a distributed database. Using cryptocurrency as an example, we call the database a blockchain-so a consensus mechanism secures the blockchain.

Key Takeaways

  • Proof-of-stake (POS) is a cryptography technique that rewards cryptocurrency owners for staked coins that are used to validate block transactions.
  • To validate and add new blocks to a blockchain, Proof-of-Stake (POS) was created to replace Proof-of-Work (POW).
  • Mining mechanisms require miners to solve cryptographic puzzles, while PoS mechanisms require validators to stake tokens to earn transaction fees.
  • It is more difficult for a network to be attacked with Proof-of-Stake (POS), since it structures compensation so that attack is less beneficial.
  • Block writers on the blockchain are picked at random, with stake positions having higher odds.

Goals of Proof-of-Stake

Proof-of-stake (PoS) has several advantages over proof-of-work (PoW). One of the biggest advantages is that it reduces network congestion and environmental sustainability concerns. PoW encourages individuals to seek ways to gain an advantage, which can lead to high energy consumption and other associated costs. In contrast, PoS substitutes staking for computational power, which reduces energy consumption and makes mining less energy-intensive. PoS allows an individual's mining ability to be randomly determined by the network, eliminating the need for massive farms of single-purpose hardware to gain an advantage. Peercoin was the first cryptocurrency to adopt the PoS method, followed by Nxt, Blackcoin, and ShadowCoin.

Proof-of-Stake Security

Proof-of-stake (PoS) has been marketed as a solution to the energy consumption and centralization concerns of proof-of-work (PoW). However, there are concerns about the possibility of a 51% attack in a PoS network, which is when an individual or group owns 51% or more of the cryptocurrency staked and can potentially alter the blockchain with that majority.
While this is a legitimate concern, it is very expensive to control 51% of staked cryptocurrency, making it less likely to occur. In addition, the honest validators in a PoS network could refuse to accept the altered blockchain if a 51% attack did occur.
Most PoS systems also include additional security features as part of their design, although they are not always advertised to avoid potential vulnerabilities being exploited. Overall, blockchain and PoS mechanisms are naturally secure, and PoS offers a more energy-efficient and environmentally sustainable alternative to PoW.