What Is Proof of Stake (PoS)? PoS in Crypto Explained

Proof of Stake (PoS) is a consensus mechanism that requires validators to “stake” or lock up tokens in a smart contract to participate in the transaction validation process. 

Compared to a Proof-of-Work (PoW) consensus mechanism like Bitcoin’s, proof of stake significantly reduces the energy needed for the network to operate. 

Due to the lower energy requirements, proof of stake has become one of the most popular consensus mechanisms chosen by blockchain networks. 

Proof of stake algorithms use a combination of factors including staking age, randomization, and the value held on a node to complete a pseudo-random election process that selects validators from a group of nodes. 

Unlike PoW mechanisms that start with a token supply of zero and require mining for tokens to be created, proof of stake cryptocurrencies launches with a supply that is ‘pre-forged’ (as opposed to mined) so nodes can begin validating transactions immediately after network launch.

Token holders who wish to participate in the block forging process must lock a certain amount of tokens on the network. This holding is known as the stake. The amount of tokens staked is one of the determining factors in whether or not a node is chosen to be the next validator. Larger stakes have better chances. 

Some protocols implement other node selection criteria including Randomized Block Selection and Coin Age Selection to help balance the playing field and ensure others besides the wealthiest nodes can participate in the validation process to earn rewards. 

Randomized block selection

Validators are chosen by looking for nodes with a combination of the lowest hash value and the highest stake. 

Coin age selection

Nodes are chosen based on how long their proof of stake tokens have been staked. Coin ages are calculated by multiplying the number of coins staked by the number of days the coins have been staked. Once a node has been chosen to forge a new block, its coin age is reset to zero. The node must wait a specified amount of time before it will qualify to forge another block. This helps to prevent large staking nodes from controlling the forging process on a network. 

Validating transactions

Each separate proof of stake consensus algorithm contains its own set of rules and methods that the network utilizes to operate in the manner determined to be optimal for the network and users. 

Once a node is selected to forge the next block, it first checks to see if transactions in the block are valid. Once deemed valid, the node signs the block and adds it to the blockchain. As a reward for completing the forging process, the node receives the transaction fees from that block along with a coin reward, depending on the network. 

To retrieve a stake and earn rewards, a cool-down period is typically required in order to give the network time to verify that no fraudulent blocks were added to the blockchain by the node in question. 

The structure of the proof of stake consensus mechanism gives the model some benefits in relation to other mechanisms. However, there are a few potential security pitfalls that are exclusive to PoS models. 

Proof of stake systems are more susceptible to centralization than other models since stakeholders can vote on what transactions are deemed as valid and then mined. This opens up the potential for one actor, or a group, to wield enough coins to double-spend or stop certain transactions from being confirmed. This also opens up the potential for collusion attacks where stakeholders strategize together to vote on certain consensus changes (like voting out a validator). 

Despite these risks, it remains harder for a malicious user to work and acquire at least 51% of a network’s staked tokens than either buying or renting enough computational power (in a PoW system) to gain control. 

If a bad actor were to start purchasing liquidity, the price of the existing token would rise, which would only exponentially increase the cost of a potential 51% attack on a PoW system. Bad actors in a PoW system can be blacklisted with any held coins ‘deleted.’ Attackers would have to buy back coins if they wanted to try another attack. 

Users with larger stakes in a PoS system have a natural economic incentive to act honestly, which promotes democracy, fairness, and an incentive to protect hard work by cultivating a strong reputation. 

After Ethereum’s much-awaited ‘Merge’ to proof of stake, co-founder Vitalik Buterin explained a 51% attack on the massive network would not be fatal. According to him, an attacker would be “slashed,” or “soft-forked away and inactivity-leaked” so they would ultimately lose control over any coins used to launch the initial assault. 

• Adaptability – PoS chains can change over time to meet the needs of the blockchain and its users.
• Decentralization – The lower cost required to participate in validating transactions makes it so that more users can run nodes. This helps to make a network more decentralized as it provides a larger number of nodes to select a validator. 
• Energy Efficiency –  PoS is significantly more energy efficient than PoW.
• Scalability – Since proof of stake doesn’t require physical machines to conduct consensus, it is far more scalable than PoW chains. Without the need for huge mining farms and large energy supplies, adding more validators to a cryptocurrency proof-of-stake network is cheaper, simpler, and more accessible. 
• Security – Requiring a token lockup is a form of financial motivation for the validator not to process fraudulent transactions. If fraudulent transactions are approved, the validator in question will lose a part of its stake and will have its right to validate transactions in the future revoked. 

• Forking – With PoS mechanisms, it's easier and less costly for a node to mine or forges on both sides of a fork. Due to this, forks are more likely to occur with PoS chains as the costs associated with it are minimal compared to participating in forks of PoW chains, which can lead to a waste of energy. 
• Accessibility – A supply of native tokens is required to begin participating in the staking process. Depending on the chain, this can result in a significant upfront investment that may price many participants out of the process. 
• 51% Attacks – 51% attacks are significantly easier to conduct on proof of stake chains. Due to the volatile nature of the cryptocurrency market, significant declines in price have the potential to make it relatively inexpensive to purchase more than 51% of the available tokens and control the network.