Proof of Stake for Noobs
Proof of Stake is a consensus mechanism used in cryptocurrency where validators on the blockchain are determined by the amount of coins they are staking.
Proof of Stake (PoS) is a consensus mechanism used in cryptocurrency where validators on the blockchain are determined by the amount of coins they are staking in the network. PoS is an alternative to Proof of work, where validators (miners) are determined by the first computer to solve a puzzle, rather than having a stake in the network. Both processes aim to bring consensus to the blockchain, but the path to get there is very different.
In this article we’ll discuss how PoS works, and some of its advantages and disadvantages.
Understanding Proof of Stake
In PoS, the term staking refers to a validator locking up funds (coins) for a certain amount of time within the network. This is the only way to participate as a validator. Validators in a PoS network are financially motivated to follow the rules or risk losing the coins they stake, this is what allows for a distributed consensus in a PoS network.
An important distinction between PoS and PoW systems is that in PoS blocks are “forged” and coins are sold with the launch of the currency. In PoW, blocks are mined and new coins are only created when a validator solves a cryptographic puzzle.
One of the main purposes for PoS is to combat the resource intensive PoW method. In PoS, validators are selected based on a number of factors that are dependent on that network’s rules.. A few common factors are the size of the stake, how long the coin has been staking, and typically there is a randomization mechanism involved to ensure that all validators have a chance to participate in the network, and no single validator gains an advantage over forging. If a validator is selected to validate the new block on the blockchain, they are rewarded with the network’s currency.
Pros and Cons of PoS
A big benefit to PoS is that it requires significantly less computational power than PoW to achieve the same secure and reliable result. Validators do not need specialized mining computer hardware in order to stake, so it is more accessible to a broader community of participants. With a lower barrier of entry, it is much easier to scale to a larger network.
A downside to the PoS system are the penalties for a network computer (node) not completing the validation process if they were selected. If you are signed up as a validator and for some reason don’t complete the task (i.e. computer is turned off, bad internet connection) your stake will be “slashed”. This is where you lose a portion of your initial stake, and therefore incentivizes nodes to be very reliable. As a network grows, the size of the stake required to be a validator grows with it.
Fun fact: On the Ethereum 2.0 network, you must stake 32 ETH per node to be a validator.