Blockchain: what is Proof-of-Stake (PoS)

One of the fundamental concepts to understand in order to deepen the knowledge of the world of blockchain and cryptocurrencies is that of the so-called Proof-of-Stake (PoS).

In order to delve deeper into this topic, it is necessary first of all to know what is meant by blockchain.

The Proof-of-Stake Blockchain: the difference between centralized and decentralized

By itself, a blockchain would simply be, as the name suggests, a chain of blocks linked together.

But the fact that a file is made up of a chain of blocks, where each new block is concatenated to the previous one, is not in itself a big deal.

Actually, to tell the truth, since the blockchain is fundamentally used as a form of database to record, store, and read data, there are much more efficient and powerful ways to do it.

The true and unique great advantage of using a blockchain to record data is that in this way the database can be public, shared, searchable and verifiable by anyone, and above all managed by a decentralized protocol.

Therefore, blockchain really makes sense only if it is used as a ledger for a decentralized protocol, because for centralized protocols or infrastructures it does not turn out to be a good solution at all.

But since the true blockchains are only those decentralized, we must consider how to allow anyone to record their transactions inside them without creating confusion and in a way that everyone always respects all the rules.

Blockchain: The Proof-of-Stake (PoS) consensus mechanism

This issue revolves around the so-called consensus mechanism, which is an automated, open procedure that can be used by anyone without special permissions (permissionless) to validate transactions.

The goal is to ensure that only correct and legitimate transactions are recorded on the blockchain, without having to rely on any particular individual to approve them.

Indeed, in order to be truly decentralized, blockchains must not have special users with privileges or particular power: all users are and must be on the same identical level, in perfect P2P style.

Consent mechanisms are precisely those procedures, inherent in decentralized protocols, that allow not only the validation of transactions, but also and above all their full verifiability by anyone.

In the cryptocurrency sector, the most commonly used consensus mechanisms are Proof-of-Work (PoW) and Proof-of-Stake (PoS).

PoW was the first consensus mechanism ever used in the world on what was the first decentralized blockchain ever existed, namely that of Bitcoin.

Actually, even the second main cryptocurrency, Ethereum, was initially based on PoW, but in 2022 it switched to PoS.

The difference with Proof-of-Work (PoW)

PoW is based, as the term itself says, on a proof of work.

Bitcoin transactions are validated by miners, whose job is to search and find the hash code that validates a block. They typically take about 10 minutes to find it, although this duration depends on the overall hashrate of the network, so it often turns out to be less than 10 minutes since there is plenty of hashrate on Bitcoin.

The problem with PoW is precisely the hashrate, because mining is effectively a competition where the winner is the one with the most hashrate, and therefore effectively rewards those who have more. However, higher hashrate also means higher energy consumption, which is why Bitcoin’s PoW consumes a lot of energy.

Another issue is the slowness with which transactions are approved, as it is necessary to wait for them to be included in a valid block and for this block to be mined correctly, and generally it takes at least 10 minutes for this to happen.

The third issue is the fees, which however do not depend on PoW but on the fact that Bitcoin blocks are limited to 1 MB, thus being able to contain at most a little over 4,000 transactions.

In addition to Bitcoin, other cryptocurrencies that use Proof-of-Work include Litecoin (LTC) and Dogecoin (DOGE), two cryptocurrencies that were born more than ten years ago, but there are also Bitcoin Cash (BCH) and Ethereum Classic (ETC), born much more recently. In fact, there are more than a hundred, including Kaspa (KAS) and Monero (XMR).

Usually these are first or second generation cryptocurrencies, but not third, with some exceptions.

Ethereum, as already mentioned, initially used PoW, but in 2022 it switched to PoS.

The main features of Proof-of-Stake

To solve some of the main issues of PoW, Proof-of-Stake was invented.

With PoS there are no more miners, and there is no longer the need for hash research work.

There is no longer even a precise block-time, because instead of miners there are validator nodes that can validate blocks in extremely short times.

There is not even the hashrate, because from a technical point of view validating a PoS transaction is very easy and fast.

So PoS is faster and much less energy-intensive than PoW, but it doesn’t mean that the fees are low. In fact, Ethereum still has relatively high fees, although lower than those of Bitcoin at the moment, even though its layer-2 based on PoS now have very low fees.

The way transactions are validated on Proof-of-Stake based blockchains is very simple: validator nodes lock up a portion of the network’s native cryptocurrency they own (for Ethereum it is 32 ETH) in staking, and this way they can validate blocks.

The validator node that successfully validates a block is then rewarded, expressed in the same native cryptocurrency of the network, but if it validates a block incorrectly or does not validate it, it is automatically punished with a penalty.

So it is not convenient for validator nodes to not validate blocks, or validate them incorrectly, because they lose. It is instead convenient to validate as many as possible correctly because they gain from it.

The differences

Blockchain based on PoW are certainly more solid and secure, but they are also much more energy-intensive and therefore much more expensive.

Today probably only Bitcoin really makes sense to be based on PoW, while for all other blockchains PoS may be sufficient.

Blockchain based on PoS are in fact faster, cheaper, less energy-intensive, but still quite solid and secure, if designed and managed well. Furthermore, they allow staking, encouraging holders of the native cryptocurrency to lock it up instead of using it.

It is no coincidence that among the top ten cryptocurrencies, excluding tokens and stablecoins, there are only two based on PoW (BTC and DOGE), and of these two, one is just a memecoin that may not have a great future ahead of it (Dogecoin).

There are instead 5 based on PoS (Ethereum, BNB, Toncoin, Cardano and Avalanche), and three others based on consensus mechanisms very similar to PoS (Solana, XRP and Tron) and that have nothing to do with PoW.

The dominance of Proof-of-Stake, and similar consensus mechanisms, in the crypto space is now almost total, even though this does not concern the cryptocurrency that alone is worth more than half of the entire sector (Bitcoin).