What is Proof-of-Stake in blockchain?
Proof-of-Stake is an algorithm, also known as a consensus mechanism, that helps blockchains—and thus cryptocurrency—remain secure. Proof-of-Stake is different from Proof-of-Work (another consensus mechanism) in that it reduces the amount of computational work needed to verify blocks and transactions by using the machines of coin owners to validate blocks.
The role of validators in Proof-of-Stake
In Proof-of-Stake, coin owners offer their coins as collateral for the chance to validate blocks. Coin owners with staked coins become “validators”. Validators are then selected randomly to “mine” or validate the block.
To become a validator, a coin owner must "stake" a specific number of coins. For instance, Ethereum’s planned move to Proof-of-Stake requires 32 ETH to be staked before a user can become a validator. Blocks are validated by more than one validator, and only when a specific number of the validators verify that the block is accurate, it is finalized and added to the chain.
This system randomizes the process of selecting who gets to “mine” rather than using a competition-based mechanism like Proof-of-Work.
Blockchain consensus and why it matters
If a blockchain was a human body, consensus mechanisms would be its backbone.
Essentially, a blockchain is a distributed ledger used to record transactions that happen in the network. This technology provides transparency and security through decentralization. Because transactions are distributed across many nodes in the network in a decentralized fashion, no single entity controls these records. That’s awesome for a lot of reasons!
That said, there still needs to be agreement by all nodes and users on a network as to the “official” state or version of a ledger.
This is where consensus mechanisms come into play. There are many kinds of consensus mechanisms (Proof-of-Stake being one), but all are in place to ensure agreement among nodes in a network as to the “official” state of a distributed ledger.
In a distributed system like blockchain, there is no perfect consensus protocol, but consistency, availability, and the ability to solve for issues like offline or malicious nodes are all important. There are pros and cons to different consensus mechanisms, which we’ll explore further below, but the underlying problem these mechanisms are trying to solve is this: how can everyone agree, without anyone having control over the network?
Proof-of-Stake vs. Proof-of-Work vs. delegated Proof-of-Stake
In this section, we’ll explore the pros and cons of three major consensus mechanisms used by some of the most well-known players in the crypto space. When comparing Proof-of-Stake, Proof-of-Work, and Delegated Proof-of-Stake, it may help to think of these mechanisms as “validators” vs “miners” vs “delegators”.
Proof-of-Work (PoW) – Pros, cons, and examples
Proof-of-Work is the consensus mechanism used by Bitcoin, Ethereum, and other well-known digital currencies, and is considered by many to be the “OG” in consensus protocols.
Proof-of-Work is a “competitive” version of consensus where “miners” are selected to create new blocks by solving cryptographic puzzles. The first node to solve a puzzle has the right to create a new block. Successful miners will be rewarded in coins by the network for which they’re mining.
This method is proven to be secure and gets stronger and harder to attack as more people use it, but also requires a lot of energy to secure transactions.
- Prevents double-spending
- Time-tested on many of the largest cryptocurrencies with millions of users
- Resilient - gets stronger and harder to attack as more people use it
- Guarantees eventual consistency
- Incentive structure ensures that the bigger the network, the more secure it is
- Requires a lot of capital to get involved (money, mining machines, energy)
- Very difficult to solve these puzzles – requires a lot of computational power
- Electricity use is intensive, which could be seen as harmful to the environment
Cryptocurrencies Currently Using Proof-of-Work:
- Bitcoin (BTC) and its forks: Bitcoin Cash (BCH), Litecoin (LTC), Dogecoin (DOGE)
- Ethereum (ETH) until 2022
- Monero (XMR)
- Zcash (ZEC)
Proof-of-Stake (PoS) – Pros, Cons and Examples
Proof-of-Stake in blockchain is one of the most popular alternatives to Proof-of-Work, and aims to improve on some of the limitations of PoW, such as scalability and energy consumption.
Similar to Proof-of-Work, Proof-of-Stake requires participants to solve puzzles in order to create new blocks. The key difference: instead of relying on computational power, solving puzzles in Proof of Stake depends largely on the amount of stake (or coins) and sometimes the age of this stake.
This makes Proof-of-Stake an energy-saving consensus protocol, and preferable for many different use cases.
In Proof-of-Stake, participants are called “validators” instead of “miners”. These validators don’t need miners to compete for a chance to validate a block—they just need to stake (or lock) the native cryptocurrency of the blockchain.
As a reward for being selected as a “winner”, validators receive a base reward and a portion of the transaction fees for every block they validate. The more coins staked, the higher the reward. (Source: https://academy.binance.com/en/articles/proof-of-work-vs-proof-of-stake)
- Much more scalable – can process considerably more transactions at a much faster rate, as compared to PoW
- More environmentally friendly – uses significantly less energy than PoW to validate transactions
- Inexpensive to run compared to POW (doesn’t require investments in miners or the extreme energy costs associated with mining)
- Centralized - controlled by a smaller group of people which makes it more difficult to get involved in as a participant
- Not as “open market” as POW - the rich tend to get richer, which centralizes power
Cryptocurrencies currently using Proof-of-Stake:
Delegated Proof-of-Stake (DPoS) – Pros, Cons and Examples
Delegated Proof-of-Stake allows nodes who hold stake (or coins) in a specific cryptocurrency to give their rights to create blocks to delegates, instead of creating blocks themselves. These delegates are chosen based on approval ratings, and are given “coins” by those who delegate to them to use towards creating and distributing blocks. Rewards are then split between these validators and those who have coins staked with them. Most validators charge anywhere between 5-10% commission, meaning the other 90-95% of rewards are given back to their delegators. Some view this as a win-win because non-technical users can still participate in rewards while their delegator, who is most likely more technical and better at running a node, get paid a small fee for their services.
Compared to Proof-of-Stake and Proof-of-Work, DPoS is much faster and has greater throughput because fewer nodes are needed in order to reach consensus. DPoS also consumes less energy, due to fewer nodes being involved in the validation process.
- DPoS allows for block producers to validate transactions in seconds – provides faster transactions than PoS and PoW
- Delegates are elected through a democratic voting system, so each token holder has a say
- Security: voters can immediately detect malice on the part of a delegate, and that delegate can then be voted out of the system
- DPoS is even more energy efficient than PoS and uses less hardware
- Block producers, or Delegates, can be voted out of the system at any point – so they’re forced to be on their best behavior
- Delegate Cartels: By putting validation into a small number of hands, Delegates can form cartels making the blockchain less decentralized and less resilient to attacks
- If coin holders are not engaged in the voting process, the system cannot function as a proper democracy – you’ll have a few people making decisions for the many
Cryptocurrencies that currently use delegated proof-of-stake:
How to become a validator on Secret Network
If this article has piqued your interest in Proof-of-Stake in blockchain and you’re interested in becoming a validator, check out these resources on Secret Network: https://scrt.network/developers
Secret Network is the first blockchain with data privacy by default, allowing you to build and use applications that are both permissionless and privacy-preserving. This unique functionality protects users, secures applications, and unlocks hundreds of new use cases for Web 3.
More specifically, Secret Network operates under the Delegated Proof-of-Stake model discussed above. To learn more about node running for Secret Network, visit this page: https://docs.scrt.network/node-guides/run-full-node-mainnet.html