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    Proof of Stake Consensus

    Pathik Bhattacharya
    Pathik Bhattacharya
    Published on November 15, 2022 10:07 AM

    Updated on January 16, 2023 1:42 PM

    Proof-of-stake reduces the computational effort required to validate blocks and transactions.
    Proof of Stake Consensus

    To validate a transaction into the Blockchain ledger securely is called proofing and in doing so, the approach used is called Proof Consensus. Proof of stake is a consensus method for approving incoming cryptocurrency transfers. As centralized regulatory bodies are absent from blockchains, proof of stake is a way to ensure that data recorded on the network is accurate.

    Let’s understand Proof of Stake in brief.

    What is Proof of Stake?

    Proof-of-stake is a consensus algorithm used by cryptocurrencies to process transactions and add new blocks to a blockchain. A consensus protocol is a technique for ensuring the security of a distributed database and validating entries. Since the database in the case of cryptocurrencies is referred to as a blockchain, the consensus process protects the blockchain.

    Proof of stake involves participants who are referred to as "validators" locking up predetermined quantities of crypto tokens—their stake, like a blockchain-based smart contract. In return, they get the opportunity to vouch for fresh transactions and receive a reward. However, they risk losing all or part of their interest if they incorrectly validate false or fraudulent data.

    Some of the major cryptocurrencies that employ proof of stake include Solana, Terra, and Cardano. Proof of stake has replaced proof of work in Ethereum, the second-largest cryptocurrency by market capitalization.

    How Does Proof of Stake Work?

    The proof-of-stake approach enables cryptocurrency owners to stake their own currencies and establish their own validator nodes. Staking is the act of committing your coins for use in transaction verification. While you stake your coins, they are locked up, but you can un-stake them if you want to swap them.

    The proof-of-stake mechanism of the cryptocurrency will pick a validator node to examine a block of transactions when it is ready to be processed. The block's transactions are examined by the validator to determine their accuracy. 

    If so, they upload the block to the blockchain and are rewarded with cryptocurrency. However, as a punishment, a validator loses some of their staked holdings if they suggest adding a block that contains false information.

    How Proof of Stake Differs from Proof of Work?

    The two most prevalent forms of consensus techniques used by cryptocurrencies are proof of stake and proof of work. Early cryptocurrencies like Bitcoin used proof of work, whereas proof of stake was first used by Peercoin in 2012 and has since spread across altcoins.

    The energy consumption of proof of stake and proof of work is their primary distinction. In order to prove their claims, miners must compete to solve challenging mathematical puzzles. The ability to add a block of transactions and receive rewards belongs to the first miner to solve the problem. As a result, mining equipment uses a lot of energy to process the same problems globally.

    Proof of stake is a far more environmentally friendly method of transaction verification because it doesn't require all validators to solve difficult equations. The one who stakes much will get the authorisation first. 

    Although the Proof of Stake is supported by many developers due to its low energy consumption, it's been criticised for eliminating small investors over high-staking companies. This makes the system more centralised.

    Proof of Stake Sustainability Issue

    Proof of Stake consensus may result in a situation where validators with larger stakes are allowed to be at the top of transaction blocks. For instance, having the required stake value of 32 ETH (or roughly $40,328) to become a validator on the Ethereum network.

    One of the most frequently discussed subjects in blockchain communities is the fact that Proof-of-Stake often leads to centralization.

    Therefore, a larger stakeholder develops more quickly than a smaller one. The expense of participating in the mining operation would eventually become prohibitive, forcing minor players to leave and leading to centralization.

    Additionally, this has the effect of making decentralization increasingly unsustainable causing the rupture of the basic nature of decentralisation sustainability.

    Proof of Stake Security

    The 51% attack, which has long been portrayed as a risk for crypto traders and holders, is a risk when PoS is employed, although it is unlikely to happen. A 51% assault occurs in a PoW network when a single entity has more than 50% of the miners and utilizes that majority to change the blockchain. A person or group would need to own 51% of the staked cryptocurrency in a PoS system.

    The cost of holding 51% of a cryptocurrency stake is very high. If a 51% attack took place in Ethereum's PoS system, the network's honest validators may vote to reject the revised blockchain and burn the offender(s) staked ETH. As a result, validators are encouraged to operate honestly in the interests of the cryptocurrency and the network.

    Source: etherscan.io

     

    In the above chart, you can see that most of the bitcoin by percentage is held by the Bacon deposit contract which is 12% of the total supply chain. If in the future the Beacon chain gets the 51% of the total chain supply, it could become an entity which could easily interfere with the blockchain transaction system as well as into the ledger.

    Top Cryptocurrencies Using Proof of Stake

    In the world of cryptocurrencies, proof of stake is becoming more common as a consensus technique. PoS is the consensus process used by roughly 80 different cryptocurrencies at the moment. The most widely used coins that employ proof of stake include:

    • Ethereum (ETH)

    • Cardano (ADA)

    • Tron (TRX)

    • EOS (EOS)

    • Cosmos (ATOM)

    • Tezos (XTC)

    How does Different Protocol use the Proof of Stake Consensus?

    Cardano: Cardano can be staked and set up by anyone who owns it as a validator node. The Ouroboros protocol used by Cardano chooses a validator when blocks of transactions need to be verified. The block is verified by the validator, who then adds it and rewards them with additional Cardano.

    Ethereum: Before a user may become a validator on Ethereum, 32 ETH must be staked. Blocks are validated by many validators, and when a certain number of validators confirm that the block is correct, it is finalized and closed.

    Tron: TRON is protected by a variant of the conventional proof-of-stake (PoS) technique known as delegated PoS (DPoS). To verify transactions and organize them into blocks, 27 super representatives (SRs) are elected. TRX holders can vote for their favourite SRs based on their previous performance and qualities.

    Conclusion

    Proof of stake helps both cryptocurrency users and their investors because of how it functions. Proof of stake-based cryptocurrencies is able to execute transactions rapidly and affordably, which is essential for scaling. Cryptocurrency stakes allow investors to earn rewards and generate passive income. Proof of stake will probably gain more acceptance as a consensus process because it is environmentally sustainable.