Proof-of-stake is a method of maintaining the integrity of a cryptocurrency and preventing users from printing additional coins that they did not deserve. While Bitcoin and Ethereum – the two largest cryptocurrencies by market capitalization – are currently using a different method known as proof-of-work, Ethereum plans to migrate to proof-of-stake to make the platform more scalable and reduce energy consumption by to reduce the network.
Both proof-of-work and proof-of-stake are so-called “consensus mechanisms”, the method by which a blockchain maintains its integrity. Consensus solves the problem of “double spending” digital money. If there was a way that the user of a cryptocurrency could spend their coins more than once, it would undermine the whole system. The currency would be worthless.
This is a tricky problem, especially with online currencies that don’t have central authority, such as a bank or government, to keep track of how much money each person has, how they spend it, and who they are paying to.
The Bitcoin network was the first to solve this problem with a proof-of-work. The proof-of-stake has emerged as a possible alternative that some researchers believe is both more energy efficient and safer, although it is debated.
Why is proof of everything required?
It is not that difficult to centrally prevent duplicate expenses when one unit maintains a general ledger of all transactions. If Alice sends Bob $ 1, the central ledger manager simply takes $ 1 from Alice and gives Bob $ 1. That is exactly what PayPal does.
But cryptocurrencies are different. The goal is not to have a leader or unit in control of the system, which complicates these records.
Instead of a single market leader, thousands of users run Bitcoin software around the world. These “nodes” ensure that the rules of the network are followed. This vast infrastructure has to be interconnected so that all software is consistent. Otherwise these nodes will become separate islands.
It turns out that getting these users around the world to come to an agreement is not easy, so decentralized money has been out of reach for researchers for a long time. Until bitcoin came. Proof-of-Work is the innovative algorithm developed by Bitcoin inventor Satoshi Nakamoto that brings decentralized money to life for the first time without a guide.
Proof-of-work vs. proof-of-stake
Some argue that the proof-of-work has problems. As bitcoin mining has become more concentrated, some groups have become more powerful than the creator of bitcoin intended. And Bitcoin currently uses at least as much energy as all of Switzerland. (Others argue that it isn’t that bad because the current financial system is also very energy consuming.)
In short, these proof-of-X schemes help to verify which transactions are being added to the blockchain via blocks that are filled with the latest transactions. The winner receives a reward.
Proof-of-work and proof-of-stake each choose a “winner” – the unit that will create the next block – in different ways.
In the proof-of-work, miners are the participants. They’re more likely to add additional blocks to the blockchain when they have more computing power that runs on electricity.
With the proof-of-stake, miners are more likely to win additional blocks if they have more money – in the case of Ethereum Ether. In other words, the proof-of-stake relies on “proof” of how much “stake” the users are.
Critics argue that proof-of-stake has not yet been proven to eliminate these problems. But proponents think this could be the way forward.
Frequently asked questions about the proof of stake
How does Ethereum’s proof of stake work?
The most ambitious proof-of-stake rollout to date is Ethereum 2.0, a series of upgrades designed to move Ethereum from proof-of-work to proof-of-stake. This is how it works at a high level.
With the selection of the next blocks for the Ethereum blockchain, special bodies in the proof-of-stake, known as “validators”, are commissioned.
Validators tie up part of their ether so that they cannot use it as they participate in the proof-of-stake process. Similar to miners in proof-of-work, they are rewarded for participating in this process.
Validators are issued if:
They confirm a new block, which means that they accept it as correct and say that it complies with the rules.
- They confirm a new block, which means that they accept it as correct and say that it complies with the rules.
- You “win” a block.
To ensure that the validators aren’t fooling around, Ethereum’s proof-of-stake also imposes fines.
Penalties are imposed if:
- When a validator suggests a block with an incorrect transaction or data history, a significant portion of the validator’s staked resources is truncated by the protocol. In addition, the validator is banned from the network in order to punish this bad behavior.
- Lesser penalties are imposed when the validator goes offline.
In Ethereum 2.0, each Validator must deploy 32 ethers worth approximately $ 12,000 at the time of writing to run a Validator Node.
Is proof-of-stake better than proof-of-work?
Not necessarily. This question is still up for debate.
Proof-of-stake has attracted more than a few critics. One reason for this is that Ethereum developers are quick to tout the benefits of proof-of-stake, but it hasn’t been proven to work because it doesn’t exist yet. Andrew Poelstra, Director of Research at Blockstream, wrote a mathematical paper back in 2015 in which it was stated that the proof-of-stake “is fundamentally unable to establish a distributed consensus within the Bitcoin trust model”.
But if the proof-of-stake works, either with no or minimal complications, then it could be a greener alternative that accomplishes the same goals as a proof-of-work, but more efficiently.
Is the proof of stake secure?
As the answer to the above question emphasizes, the jury has not yet decided whether the proof-of-stake is “safe”.
Critics argue that the systemic risks lead to an oligopoly. While blockchains are not supposed to have leaders, critics fear that a proof-of-stake would inadvertently steer blockchain back towards centralized control, as users with the most ethers have the most power over the system.
The proof-of-stake is a long-awaited addition to Ethereum. The Ethereum inventor Vitalik Buterin suggested it back in 2013 in a whitepaper.
When will the proof-of-stake be introduced on Ethereum?
And it is not yet clear when it will be fully implemented. As mentioned earlier, the Proof-of-Stake is to be implemented gradually as part of Ethereum 2.0, a series of upgrades to restructure Ethereum.
The first phase of Ethereum 2.0 started on December 1st, 2020. It is unclear how long it will take to go through all phases.