Proof of stake is the second most popular mining consensus protocol for blockchains, behind proof of work.

Proof of stake was originally developed mainly as a solution to proof of work’s harmful environmental impact, but also has the added benefit of being a fairer system when it comes to distribution of mining rewards.

In this article we will discuss the benefits, the downfalls, as well as the rewards of proof of stake and examine how it compares to proof of work.

Note:

This article assumes you have a basic understanding of how blockchain mining works and how rewards are attributed to miners  as an incentive for validating transactions. If you’ve like to learn more about blockchain and crypt omining, our article here gives a thorough introduction.

How Is Proof of Stake Used?

Miners in proof of stake are called validators because they are responsible for validating the transactions in a block on the blockchain.

In order for someone to become a validator on the blockchain, they are required to stake a certain amount of the cryptocurrency on the network. This then makes them available to be randomly selected by the network to validate some transactions.

Once the validator has validated the work assigned to them, the other validators then attest to seeing the newly formed block. Once the block has received enough attestations, it is added to the blockchain.

Proof of stake distributes mining power to the validators on the blockchain based on the proportion of coins held by the validator. This way, a proof of stake validator is limited to mining the percentage of transactions that is reflective of his or her ownership stake.

So, if a validator owns 5% of the total circulating supply of the cryptocurrency, they are only allowed to validate 5% of the blocks. This results in a more energy efficient blockchain as not everyone is working on the same problem all of the time.

Why Is Proof of Stake Good?

Energy Efficient

The proof of stake consensus mechanism is very energy efficient because, unlike its counterparts, it does not need every validator to process the entire blockchain’s transactions.

As each validator is limited to how many transactions they can validate, the overall electricity consumption of all the validators is reduced, which in turn reduces the carbon footprint of the mining consensus mechanism.

Scalable

Since proof of stake consumes less electricity overall, it has more potential for scalability compared to alternatives.

More validators can join the blockchain, which results in more transactions that can be processed.

Since more people can become validators, the workload of validating all of the transactions can be distributed in smaller segments which results in faster transaction processing.

Prevents 51% Attack

A 51% attack is when a validator or miner is able to gain control of 51% of the computers in a blockchain. This gives them majority control and voting power over a blockchain, which gives them the power to manipulate the blockchain.

Depending on the coin, a 51% attack is likely to be a very expensive practice e.g. the cost to own all the computers to be able to control 51% of the Bitcoin network would run into the trillions of ZAR.

Not only that, but proof of stake actually means that a 51% attack would not be in the best interest of an attacker. This is because by controlling 51% of the blockchain’s validators it means that they control 51% of the supply of the currency. If an attack were to be executed on the blockchain, the attacker risks losing money as their staked cryptocurrency will drop in value. If the blockchain is big enough this could be a substantial loss.

The Downsides of proof of stake

Risk of Centralisation

Since validation is distributed based on the size of a validator’s cryptocurrency holding, a single validator could centralise the mining rewards by by acquiring a large majority of the circulating supply.

Due to the large stake, they would have a better chance of being selected to process a large portion of the blockchain’s transactions and would therefore continue to earn the majority of the available rewards.

Constant Connection Required

When proof of stake is being used, the network randomly selects validators to validate transactions. If the validator is not online, the network can’t select them and ot risks missing out on opportunities to earn rewards.

To ensure that a validator has a constant internet connection, they could look at setting up their node with a host provider. There are a lot of available options. Amazon Web Services (AWS) or Afrihost are some notable hosting service providers.

All that is required is to purchase some server space, set up your wallet, send the required amount of cryptocurrency and you are able to begin staking.

While it is a little more complicated than that, setting up a staking node on a server is outside the scope of this article.

Barrier To Entry

Staking on a proof of stake blockchain requires that you send a certain amount of cryptocurrency to a staking wallet. If you want to stake a well-established cryptocurrency then it might be a bit expensive as you need to possess the cryptocurrency to be able to stake. This creates a barrier to entry for most individuals who can’t afford to pay the required staking deposit.

To get an estimate of how much it would cost to stake a well established cryptocurrency, we’ll take a look at Dash. Dash was released in 2014 and uses a modified version of the proof of stake mechanism.

To stake on Dash and to be considered to process transactions requires a deposit of 1,000 Dash to a staking wallet.

At the time of writing Dash’s price is around $123 (around ZAR1,400). That means it would cost you $123,000 (ZAR1.4m) to stake with Dash.

As you can see, this is a bit expensive for the average person. Especially for South Africans with the high exchange rate between the Rand and the Dollar.

The Rewards

As with all crypto mining, the reward is the incentive to contribute processing power to validate transactions.

Each validator on the blockchain is assigned transactions to validate. They then take these transactions and form blocks to be added on the blockchain.

Other validators then also attest to seeing the validator creating and packaging the block of transactions.

The network then randomly selects which block will be added to the blockchain next.

This random process includes a range of criteria, including examining the validator’s cryptocurrency stake how low the hash of the block (and therefore how complex the puzzle to be solved) is.

A validator is rewarded for their work if their block gets randomly selected to be added to the chain. This reward comes in the form of all of the transaction fees of the latest block added to the chain – the  block that they have just validator processed.

This reward is distributed between the validator responsible for the block and all of the validators that attested to the block’s creation – each is rewarded for their work in creating the new block of transactions.

The rewards in proof of stake are therefore made up of two parts: the validating reward, and the attest reward. The validating reward is for validating blocks of transactions. The attest reward is for attesting other validators’ work on the blockchain.

Blockchains which use proof of stake

While the largest cryptocurrencies use proof of work, including Bitcoin and Ethereum, major coins which use proof of stake include: