What is Proof of Stake?

Proof-of-Stake (PoS) is a consensus mechanism used by blockchain networks to achieve distributed consensus and validate transactions. Unlike Proof-of-Work (PoW), which relies on computational power to solve complex mathematical puzzles, PoS selects validators based on the amount of cryptocurrency they have staked, or locked up, as collateral. In a PoS system, validators are chosen to create and verify new blocks based on the quantity and duration of their stake, providing them with a financial incentive to act honestly and maintain network security. Validators earn rewards in the form of additional cryptocurrency for their participation, while those who engage in malicious behavior risk losing their staked assets through penalties. PoS is known for being more energy-efficient than PoW, as it eliminates the need for energy-intensive mining processes, making it a more sustainable option for blockchain networks.

In a PoS consensus mechanism, the amount of computational effort required to verify blocks and new transactions is reduced in comparison to PoW primarily because PoS does not rely on the same energy-intensive process of solving cryptographic puzzles. 

Put simply, the reduction can be largely attributed to the difference in how blocks are verified. For PoW miners are competing against one another to solve the mathematical problems, this process requires significant computational power and energy consumption. On the one hand, the mining process is designed to be difficult and resource intensive to secure the network against attacks. However, the energy inefficiency and significant costs make it unachievable for many miners.

Alternatively, PoS operates in such a way that the validators are chosen to create and validate new blocks based on the amount of their own cryptocurrency they are willing to stake as collateral. The selection process for a validator considers the amount of cryptocurrency stakes and then amount of time in which it has been staked. These factors ensure that validators have a vested interest in maintaining the integrity of the network. 

In this sense, the approach isn’t as ‘competitive’ as PoW as it isn’t leveraging the competitive rewards-based mechanism like PoW does. But, it is important to note that whilst PoS doesn’t directly involve competition in solving cryptographic puzzles, validators are still competing for the opportunity to validate the blocks based on their stake and performance in the network itself.

To put PoS into context, Ethereum 2.0 is a great example. Having migrated from PoW to PoS in September of 2022, validators within the Ethereum 2.0 network are chosen to create and validate new blocks based on the amount of ether they stake as collateral. To be considered as a validator for Ethereum 2.0, validators must have staked at least 32 ether. It is worth noting that staking any more than 32 ether doesn’t increase the chances of being chosen as a validator.

The role in which the chosen validators play is in the facilitation of checking and confirming network transactions, maintaining the integrity of the Ethereum 2.0 blockchain and voting on any network changes. As a reward for their contributions, validators are awarded with additional ether.

Full Nodes, so those acting as validators who have staked their ether, are selected randomly every 12 seconds. The chosen validators are then given the chance check and confirm any new transactions. With their staked ether as collateral, the validator has the financial commitment of their own collateral to discourage any malicious or dishonest behavior. 

Overall, the shift to PoS reduced the overall requirement for energy-intensive mining. Given the global pressure when it comes to environment concerns, this shift to a more efficient approach that is deemed more environmentally friendly is now securing the network. 

Both the PoW and PoS consensus mechanisms aim to ensure the successful synchronization of data, validation of information, and processing of transactions within the blockchain. Though both have demonstrated effectiveness in maintaining the integrity of a blockchain, they each come with their own advantages and disadvantages.

Ultimately, PoW and PoS take different approaches to tackle the same issue, which is achieving an honest and trustless system that encourages participants to voluntarily record data without malicious intent. For example, PoW approaches the problem by combining effort and reward, whereas PoS relies on a financial commitment from the validator in requiring they stake their crypto. 

From a flexibility perspective, both models are confronted with scalability constraints, however both have enough flexibility to support layer 2 solutions that enable fast and less expensive transactions. 

One of the key differences between the two approaches is the environmental impact. If we take the example of Ethereum, they estimated that following the Merge, whereby they switched from a PoW to a PoS consensus model, their CO2 emissions dropped by 99.992%.

In a similar sense, another difference is the PoW halving models have a tendency to support a better distribution of wealth over time. Whereas, PoS does not allow for larger holders to experience significant enrichment. However, it is worth noting that inequality in terms of the distribution of wealth is a wider society problem, technology alone cannot resolve this.