The basic foundation of blockchain technology relies on the notions of decentralization and distributed databases. However, one of the most critical highlights of blockchain is the need for network nodes to achieve consensus on the existing state of the network. Therefore, consensus mechanisms are one of the significant architectural concepts in the blockchain landscape. As of now, there are two most prominent variants of consensus mechanisms, such as Proof-of-Work and Proof-of-Stake consensus mechanisms. While Proof-of-Work has been the conventional choice for achieving consensus in blockchain networks, it brings a wide range of setbacks.
Proof of Stake aims to resolve the setbacks evident in the case of Proof-of-Work, with renowned examples such as Ethereum leading the change by shifting away from Proof-of-Work. The following discussion offers a detailed impression of Proof of Stake fundamentals alongside insights on how does proof of stake work. Let us learn about Proof of Stake comprehensively.
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Understanding Consensus Mechanisms
One of the first things you need to understand, “what is Proof of Stake in blockchain,” is the definition of consensus mechanisms. The consensus mechanism is basically a method followed in distributed systems where the network reaches an agreement on a single source of truth. You can notice a clear deviation from the centralized systems, which have a single controlling entity deciding the source of truth.
On the contrary, distributed systems such as blockchain depend on the cooperation between different autonomous authorities for the maintenance of one network. Now, all the autonomous authorities or independent nodes require a computational approach for reaching agreements regarding the most recent and precisely accurate data records. Therefore, distributed networks have to rely on an identical cryptographic mechanism for reaching consensus.
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Proof of Work Consensus
Before we move towards an understanding of the PoS consensus mechanism in blockchain, let us reflect on the Proof-of-Work consensus. Proof of Work or PoW consensus mechanism is presently the most commonly implemented consensus mechanism. The founder of Bitcoin, Satoshi Nakamoto, introduced the Proof of Work consensus with the whitepaper for Bitcoin in 2008. As a matter of fact, Proof of Work has been a highly credible and secure consensus mechanism preferred by many of the high-profile blockchains.
Proof of Work depends on two important factors such as miners and computation resources. Miners, in the case of Proof-of-Work consensus, refer to the entities or individuals responsible for network maintenance through the operation and management of nodes. Miners use computational resources for solving extremely complex mathematical puzzles. The whole premise of Proof-of-Work consensus relies on competition between miners for solving mathematical problems.
The first miners to solve the problem get the privilege of adding a block of transactions to the blockchain. Therefore, miners have to use electricity and advanced computational power to participate in Proof-of-Work consensus. Proof-of-Stake aims to address the concern of energy expenditure with Proof of Work consensus. How? Let us shed some more light on the Proof of Stake consensus mechanism.
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Proof-of-Stake Consensus
Now that you have a proven consensus mechanism like Proof-of-Work offering the assurance of better security, is it reasonable to wonder about an alternative? So, what is Proof of Stake in blockchain? The answer basically implies that it is a variant of the consensus mechanism used in blockchain networks for achieving distributed consensus. Participants in a blockchain network stake their assets in the protocol for ensuring their selection of validators.
Now, validators are the network participants who would propose and validate the blocks on a Proof-of-Stake blockchain. Participants with stakes in the network would be selected randomly as validators depending on their stake. Validators have to attest to the blocks they have verified, and with an adequate number of attestations for a block, it can be added to the blockchain. The validators receive rewards for proposing blocks and validating them successfully.
Difference Between Proof-of-Work and Proof-of-Stake
The definition of PoS blockchains clearly establishes a valid case for shifting to a new consensus mechanism. Proof of Stake is different from Proof-of-Work consensus mechanisms in the basic approach. For example, you have to rely on stakes in the blockchain network as compared to computational power for adding blocks in Proof of Stake. Therefore, you can clearly notice the independence from the need to maintain expensive computing hardware with Proof of Stake.
Unlike Proof of Work, you don’t have any significant entry barriers for running a validator node on Proof-of-Stake blockchains. Furthermore, Proof of Stake blockchains also offer better levels of decentralization at the node level in comparison to PoW networks. On top of it, Proof of Stake also allows better prospects than Proof of Work for scalability through improved ease of implementing scalability solutions such as sharding.
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Working of Proof of Stake Consensus
After a clear definition of Proof of Stake consensus and its differences with Proof of Work, it is important to move to the next important detail. Without an impression of how does Proof of Stake work, it is difficult to evaluate its pros and cons. Let us assume the example of Ethereum for understanding the working of Proof of Stake consensus.
- First of all, you need to understand PoS as the underlying mechanism responsible for the activation of validators upon receiving adequate stake. In the case of Ethereum, you would need at least 32 ETH for achieving the role of the validator.
- The next important aspect in understanding how Proof-of-Stake blockchains work is the random selection of validators. The primary responsibility of validators lies in the creation of blocks as well as verification and confirmation of other blocks.
- It is also important to note the significance of the user’s stake as a driving factor for providing incentives to validators. For example, users could lose a specific share of their stake due to activities such as deliberate collusion or going offline.
Important Elements in Proof of Stake Consensus
You can develop your understanding of “what is Proof of Stake in blockchain” further by reflecting on the components in working Proof of Stake. One of the foremost highlights of Proof of Stake refers to the freedom from mining. Validators do not require a massive amount of computational power due to the lack of competition among them.
On top of it, validators do not need computational power for mining blocks. On the other hand, validators have to generate blocks when they are selected. Even if validators are not selected, they would have to validate the proposed blocks in a process called attesting. Validators receive the rewards for offering proposals for new blocks alongside attesting to blocks they have reviewed.
Let us gain further insights into the important components in the working of PoS blockchains.
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Beacon Chain
In the example of Ethereum, the arrival of Proof of Stake would also introduce the complexity associated with shard chains. The shard chains are distinct blockchains that would require validators for transaction processing and the creation of new blocks. As of now, the plan of Ethereum for shifting to Proof-of-Stake depends considerably on the introduction of 64 shard chains. Each shard chain would feature a shared understanding of the network’s state, thereby implying the need for additional coordination.
Beacon chain helps in addressing the need for additional coordination between shard chains. It receives the state information from different shards and ensures that the information is available to other shards. As a result, the network can stay in synchronization effectively. Furthermore, the beacon chain also works for the management of validators, starting from the registration of stake deposits to the process of issuing rewards and penalties.
Working of the Validation Process
If you want to learn more about the popular Proof of Stake coins, then you have to understand the validation process completely. As you have noticed in the previous paragraph, the beacon chain is an important aspect of Proof of Stake consensus. Upon submission of a transaction on a shard chain, a validator takes on the responsibility of adding the transaction. If validators are not selected for proposing new shard blocks, they would have to attest to the proposal of another validator.
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Validation Process
During the attestation process, validators have to confirm that everything in the block is exactly as specified. Interestingly, the beacon chain documents the attestation and not the transaction itself. Furthermore, it is also important to note that a minimum of 128 validators should attest to every shard block. The group of 128 validators is referred to as a ‘committee.’
On top of it, the committee must abide by a certain time frame in which they have to provide the proposal and validation for a shard block. The time frame otherwise referred to as “slot” is suitable for creating only one valid block. Now, you can have an ‘epoch’ with 32 slots, following which the committee has to be disbanded. After disbanding the committee, new random participants take on as validators. As a result, the shards can be safe from committees with malicious actors.
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Crosslinks and Finality
The final aspect in understanding “how does Proof of Stake work” would take us from the beacon chain and validation towards crosslinks and finality. After passing a new shard block through adequate attestations, you will find a “crosslink.” The crosslink helps in confirming that a block has been added alongside verifying the presence of a transaction in the beacon chain. After the creation of a crosslink, the validator placing the proposal for the block receives their due rewards.
Another significant aspect in the functionality of Proof of Stake coins refers to finality. Finality is a specific trait of transactions in distribution networks when they are included in immutable blocks. This is where you would come across the significance of a finality protocol such as Casper in PoS blockchains.
The finality protocol helps validators in reaching an agreement regarding the state of a block at various checkpoints. Therefore, agreement from around two-thirds of validators helps in finalizing the block. On top of it, validators could also lose their complete stake if they revert back with a 51% attack.
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Delegated Proof of Stake
Any discussion on Proof of Stake consensus would be incomplete without the mention of delegated proof of stake. It is basically a recent improvement over the concept of Proof of Stake consensus, in which network users place votes and elect delegates for validation of the next block. You can also find other terms for delegates, such as block producers or witnesses.
In the delegated proof of stake consensus, users could vote on the delegates through pooling their tokens in staking pools. Subsequently, users can link their tokens to a specific delegate. It is important to note that you would not actually transfer your tokens to another wallet. On the contrary, you would be leveraging a staking service provider for staking your tokens in a pool.
The most important highlight about the delegated iteration of Proof-of-Stake consensus refers to the selection of a limited number of delegates for all new blocks. The delegates receive transaction fees from validated blocks which are shared among users with tokens in the delegate’s pool. So, users with more stakes in the staking pools can receive higher shares of the block reward.
The delegated proof of stake provides a more democratic approach for selecting the individual for verification of the next block. As a result, it can enable the participation of a diverse group of people in the consensus process. Furthermore, the restricted number of validators in the delegated PoS blockchains helps in achieving consensus more quickly.
Bottom Line
The promising improvements with Proof-of-Stake consensus algorithms have indeed shown the potential for adopting them in modern blockchain networks. With comprehensive value improvements in terms of energy efficiency, the throughput of blockchain protocols, and transaction speed, Proof of Stake is definitely an attractive proposition.
As the debate around the environmental impact of cryptocurrency gains momentum, Proof of Stake coins can serve as a promising option. However, it is also important to note that Proof of Stake is still in the initial stages of development. In the long run, a detailed understanding of the underlying rationale for Proof of Stake and inherent risks is inevitable. Learn more about consensus mechanisms and how Proof of Stake could help the future of blockchain.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
