When you long for a system that does not have any single authority or entity in charge of its core, the blockchain system is the space for you. These online decentralized applications (dApps) serve as a digital ledger and are distributed to all workers on the blockchain.
The purpose of decentralization is partially for safety, as keeping things spread out, and not stored on single servers or within one organization, keeps them more secure. The dApp system also is in place to allow multiple users to verify the data.
No Single Authority
At the core of a blockchain is the liberation of authority. No one wants there to be one central authority. The system operates with multiple blockchain users. The system is not under any one person’s or entity’s control.
But when you have money changing hands, not to mention applications, games, assets, and programs, there is a need for some law of the land. There is a need to verify blocks.
No matter the system used, blockchain users agree: there is a strong need to validate transactions.
A Consensus Mechanism
In order to do that, there are multiple methods for verifying transactions. This need for verification is done on the blockchain via a method known as consensus mechanisms. Consensus mechanisms help to distribute the entries on a database, not to mention keep the database more secure.
When it comes to crypto, that database (or ledger) is the blockchain itself. Consensus mechanisms keep the blockchain safer.
With Proof of Stake, the consensus mechanism occurs in a style in which cryptocurrency validators share the task of validating transactions. There are currently no certificates issued in the POS.
Proof of Stake Model
The proof of stake model is one such model. This method of validating revolves around the users posting their own cryptocurrency as a “stake” as a type of collateral. Staked coins are put up in an effort to be randomly selected to be a miner.
Miners are the workers that perform the computation or puzzles to create the new blocks in the blockchain. This is done by validating a block. However, in the proof of stake model, the privilege to become a miner is based on a random selection.
Proof of Work Model
Sometimes to understand one method, it is ideal to understand its predecessors. Prior to the creation of the Proof of Stake design, often referred to as POS, there was the Proof of Work (POW) model. In this style of validations, the miners are permitted without a random lottery of the selection process.
Miners instead post gas prices, or the fees paid to cover the transactions being processed, and thusly creating a competitive model. Gas prices vary. The market is set by supply and demand, much like a typical economy.
Proof of Work vs. Proof of Stake
While both POW and POS have a goal of creating new blocks in the blockchain, they go about it in totally different ways. Both also focus on verifying transactions. While neither wants there to be any one single authority or entity “in charge,” both models agree that there is, in fact, a need to validate cryptocurrency transactions.
The Power of Proof of Work
In the proof of work model, a major disadvantage is a real-world power required to operate these systems. While the computing power is derived from each miner, the overall cost of a blockchain’s mining power can be a staggering amount of energy.
Some totals show that the energy used in a proof of work model total the same as many small countries. There is an ecological footprint to consider when comparing the two models. The energy consumption of a POW blockchain is far greater than that of a POS.
A Trade of Power for Coins
The bottom line of a proof of work model is that miners are, in theory, exchanging the use of their real-world energy and computational power for virtual coins. By working out the computations or solving a puzzle to verify transactions, miners are personally taking on the cost of that energy use. The reward for this work is funded into a digital wallet.
How to Stake
Offering up a required amount of coins, in the POS model, is called “staking.” This is done to show an investment in the process. From there, miners are randomly selected.
Features of Proof of Stake
Proof of stake cannot be earned. Instead, this “pay to play” model requires you to front the crypto in order to be a validator. Users can help to secure a network and even earn staking rewards by using a platform in which the cryptocurrency has the POS validation system.
Users can even become a validator. However, the stake must be posted, per the predetermined rules of the blockchain networks.
Much like you might pool money with your friends to go in on a larger, shared purchase, those that don’t have enough coins to stake can go into a group, thusly offering a larger pot of money. The resulting group is called a staking pool.
Each validator’s stake is added to the pile, and the group fronts this collateral cash as its stake together. The group members increase their chances of “winning” the random selection. In other words, the group increases its chances of being selected to mine (or create a new block), and thusly a higher probability of the end goal: to earn rewards.
The Scalability Factor
Another argument in favor of a POS system is that it is far more scalable In the POS algorithm, the system provides for a more scalable blockchain with higher transaction throughput.
However, the POS style is less secure than the completely decentralized POW algorithm.
Overall Security of the Proof of Stake (POS)
Like most arguments for or against a methodology, there is a double-edged sword when it comes to POS. This algorithm has its own pros and cons.
For one, many cite the security of the Proof of Stake model, noting that, because it is less decentralized than a POW mode, it is less secure. With fewer points of validation, some fear that there are fewer checks and balances in place.
On the flip side of that coin, others argue that a POS mode is ideal to prevent cyberattacks because it requires any would-be hacker to control most of the coins on the blockchain. Doing so would have a high cost and would minimize the overall value of any win.
Ultimately, the POS model is less proven, being a newer style than that of the POW. What the future holds is anyone’s guess.
Who Uses POS vs. POW
Bitcoin could in the future decide to change over to a proof of stake system, but currently does not use it. Ethereum, the second most popular network, began using POW but is being touted now for its crossover to the POS model.
The process for such a massive change will likely take years to implement, and given its current standing may have many delays, as Ether is already so well established.