Several altcoins are choosing to use Proof of Stake (PoS) as their consensus mechanism, most notably Ethereum. The PoS consensus mechanism is a significant shift from Bitcoin’s legacy Proof of Work system of consensus mechanism. We will introduce you to consensus mechanisms, what PoS is, why it is superior to Proof of Work, and what issues it may have in its development.
To understand PoS, we first need to understand consensus mechanisms, also known as consensus protocols or algorithms. A consensus mechanism is a way a distributed system (a network of computers) agrees on a source of truth to stay secure. In centralized systems, this source is decided by a controlling entity, but with a distributed system, many authorities, called nodes, must cooperate to maintain the network. The system requires a computational mechanism by which nodes come to an agreement or consensus of both the most recent and accurate record of data across the system. Consensus mechanisms have established consensus among database nodes, application servers, and other enterprise infrastructure for decades. More recently, new consensus mechanisms have been developed, allowing crypto-economic systems (Bitcoin/Ethereum) to agree on the state of the network while also preventing hacks where the consensus is compromised by a hacker that controls “51%” of the network.
Courtesy of researchgate.net
Courtesy of Allerin.com
Proof of Stake
The Proof of Stake consensus mechanism consists of a group of validators that organize transactions and create new blocks on a blockchain network so that there is a consensus between nodes on the network.
Courtesy of researchgate.net
The Proof of Stake mechanism will activate a validator upon receipt of a sufficient stake. In Ethereum’s system, this is 32ETH. With Proof of Stake, validators don’t need significant computational power to mine blocks; they are randomly selected to create (propose) blocks depending on their percentage stake and, when not chosen, will validate the proposed blocks, called attesting. A user’s stake is there to ensure good behavior and punish bad behavior. Validators will receive incentives for both proposing new blocks and for attesting other validators’ blocks, while they can lose a portion of the stake if they go offline and fail to validate or lose their entire stake if they attest to a malicious block or for deliberate collusion.
5 Parts Of PoS
PoS makes several improvements over Proof of Work.
Ethereum 2.0’s Beacon Chain
Ethereum is the most prominent crypto to incorporate PoS as its consensus mechanism. It must be noted that its beacon chain is an integral part of the Ethereum PoS process. Ethereum plans is to have 64 shard chains, each with validators and attestors for new blocks. The beacon chain has the following tasks under its control:
The risk of a 51% attack is not eliminated with PoS, but the attackers put themselves at significant risk. They must control a minimum 51% of the ETH staked, which is 64 shards *128 users*32 Eth *51%*approximately 2,200USD/ETH = $294,125,568. With an attack, the price of ETH would drop, significantly reducing this staked value, which reduces the incentive of attack while increasing the incentive to keep the network healthy and secure. The validators are responsible for identifying and flagging nefarious incidents.
Proof of Stake Pros and Cons
Ease of staking- Running a node requires neither significant hardware nor energy investment. Staking pools are available if investors don’t have enough stake for a full node. (Staking Pool – a group of investors that combine their partial investments to stake a full node.)
Decentralized– PoS has increased participation. With PoW, mining means with more nodes, there is an increased percent of returns. There is an equal percent reward and representation across the network with PoS.
Secure Separation- With PoS, separation into shard chains allows increased transaction throughput by simultaneously creating multiple blocks. If a PoW system were separated, it would only lower the power needed to hack and compromise that part of the network.
Relatively untested- Proof-of-Stake is still a young consensus mechanism and when compared to PoW, much less tested.
While there are several possible consensus methods, Proof of Stake evolves older blockchains’ classic Proof of Work method. In theory, it will reduce energy consumption and hardware costs while providing a more democratic distribution of rewards and representation to the participants while simultaneously increasing security and throughput. Though these claims have still yet to be proven on a comprehensive level, the potential appears to be there, and the second-largest crypto is betting on it. Once the Ethereum 2.0 upgrade has been completed (shard chains to begin in 2022), we will get the answers to many of these questions, but until then, it is uncertain if PoS is the future of cryptos or not.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a Bachelor’s degree in Economics, a Master’s in International Business and Finance, and an MBA in Electronic Business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
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