What is “Proof-of-Stake”?

December 24, 2021

Green Guy

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If you’re new to cryptocurrency and blockchains, then we suggest you read our “What is a Blockchain?“ article before reading this one article.

How does Proof of Stake work?

Where Proof of Work uses miners to mine cryptocurrency, Proof of Stake uses validators. A validator is someone that ‘stakes‘ the blockchain’s native cryptocurrency, like Ethereum, to lock them into the blockchain.

For a validator to produce and approve blocks for the blockchain, they are randomly selected to validate transactions. The more cryptocurrency staked, the higher your chances are of selection. If a validator acts irresponsibly or maliciously, they will lose a percentage of their stake through slashing penalties.

Advantages and disadvantages of Proof of Stake

Advantages

Network alignment: Validators are economically aligned with the growth of the blockchain. Their chances of validating transactions is based on their stake. The more they stake, the higher the chance of getting selected and earning rewards.
Consumer hardware validators: Validators run on basic hardware. This makes it accessible for people to secure the network.
DAO staking providers: If you don’t have the cryptocurrency to run a validator, decentralized services like Lido allow you to stake any amount of cryptocurrency. Your cryptocurrency gets pooled together with others to run validators and is ran by the DAO.

Disadvantages

Minimum cryptocurrency requirement: Validators need a minimum cryptocurrency stake. For Ethereum 2.0, this is 32 ETH, which is unaffordable for most people. And as the Ethereum network grows, the price of ETH, in theory, will continue to increase.
Centralization: The more cryptocurrency you have, the more validators you can run. This can potentially give large holders disproportionate influence on the on-chain activity.
Staking on a centralized exchange: To offer convenience, centralized exchanges like Coinbase offer staking services. But this centralizes the blockchain giving exchanges significant influence over validating transactions.

Comparing Proof of Stake with Proof of Work

To see how Proof of Stake compares with Proof of Work, we have created a table that compares the two consensus mechanisms.

Proof of Work	Proof of Stake
Miners solve cryptographic problems to pass blocks.	Validators are randomly selected to verify transactions.
The size of blocks impacts the transactions per second.	Validators run on computer hardware. But they also need a minimum amount of cryptocurrency stakes.
Mining equipment is costly to run and maintain.	The cryptocurrency requirement to run a validator can be inaccessible. Those priced out can use third-party staking providers.
The ability to run a node depends on the block size. The greater the block size, the less accessible it is.	Validators are rewarded based on their stake.
Susceptible to 51% attacks.	Randomly selected validators can prevent collusion. This is not guaranteed.
Energy intensive and inefficient.	Energy consumption is dramatically lower. For example, Ethereum moving from Proof of Work to Proof of Stake will use 99.95% less energy.