What is the Proof of Stake (POS) consensus algorithm ?

Proof of Stake (PoS) is an alternative consensus algorithm to Proof of Work. It’s a more efficient solution for securing blockchain networks. In simple terms, in Proof of Stake blockchains, users who wish to become validators should first buy the network’s native coin and then lock it up in the network. The network then rewards them based on the amount they have locked up, or “staked”. In this article, we are going to talk about the Proof of Stake consensus algorithm and refer to some of its advantages over Proof of Work. Stay with us.

What is the Proof of Stake consensus algorithm?

Before we go to Proof of Stake, it’s better to ask what is a consensus algorithm? A consensus algorithm is a solution through which participants of a decentralized network interact with each other and agree on transactions and blocks. As you may know, a network like Bitcoin can be owned and controlled by anyone. The most important issue in such a network is “security”. How can we assure that the network is working properly? What if a malicious actor decides to attack the network? The solution to this challenge is a “consensus algorithm”. A consensus algorithm includes a predefined set of rules and conditions through which participants can make sure the network is working properly.

In the Bitcoin network, this consensus algorithm is called Proof of Work (PoW). In this network, participants should buy special devices called “miners” and consume a certain amount of electricity to validate the transactions and create the blocks. If a malicious actor decides to attack the network, he/she must acquire a huge amount of computational power and conduct a huge amount of work. Attacking a Proof of Work network is so costly that it’s practically impossible.

Proof of Work is so secure and it has a lot of advantages, but it suffers from two main problems:

• It consumes a lot of energy and is not eco-friendly;

• It’s slow and is not able to process a large number of transactions per second.

Proof of Stake is a newer consensus algorithm that was created as a response to these two challenges.

In Proof of Stake, validators must first buy the network’s native coins. After that, they have to lock up, or “stake”, these coins in the network. These validators do not need special devices like miners and everything is done using a PC/laptop. The idea behind proof of stake is that the validators are the owners of the network’s native coin, so they won’t do anything that harms the network. If attackers aim at a Proof of Stake network, they must first buy a great portion of the whole coins of that network, which is also practically illogical due to the supply and demand pattern. Even if they succeed to do so, if they attack the network, the value of the native coin sharply decreases and the attacker is the first person who suffers a great loss.

Proof of Stake is much more eco-friendly and it’s also faster and more scalable. Being able to process more transactions per time is of crucial importance for cryptocurrencies’ public adoption. This is why popular blockchains like Polkadot, Cardano, EOS, Tezos, and a lot of other blockchains have preferred Proof of Stake over Proof of Work. Even Ethereum, the world’s second-largest cryptocurrency by market cap, has decided to replace its Proof of Work consensus algorithm with a Proof of Stake one. By the way, Proof of Stake also suffers from two problems which we will refer to in the next part.

Challenges of Proof of Stake

Up to this part, we reviewed the Proof of Stake consensus algorithm and its advantages over Proof of Work. However, this consensus algorithm is not flawless. Two main challenges of Proof of Stake are “centralization” and “relatively low rewards”.

We cannot say that Proof of Stake networks are centralized, but they are less decentralized than Proof of Work ones. Proof of Stake works for the benefit of those who have more coins and this trend in the long term may lead to the centralization of power among the rich.

Moreover, the reward of validators in Proof of Stake is low in comparison with Proof of Work. The average percent of interest users gain in Proof of Stake networks is 6-10% per year, and this has arisen some criticisms.

Conclusion

Proof of Stake is a consensus algorithm that was created in response to its older counterpart: Proof of Work. Proof of Stake became very popular in a short time and it attracted the attention of a lot of popular blockchain networks. It has some obvious advantages over Proof of Work, among which we can refer to less energy consumption and higher scalability. However, it suffers from its own challenges. Maybe the biggest problem Proof of Stake suffers from is the risk of centralization. Decentralization was one of the primary goals of cryptocurrencies and it shouldn’t be risked by any means. What do you think about Proof of Stake? Do you find it more successful than Proof of Work?