Insights

What is Proof of Stake (PoS)?

Ethereum’s planned move to PoS has got most of us asking, “what is Proof of Stake?”. But very few resources seem to have the answer.

With more people becoming involved in the crypto industry each day, experts need to be giving clear, accurate, and reputable information that helps new users to better understand the assets that they’ll potentially be investing in.

Once you’ve gained a basic understanding of the most common types of cryptocurrency, such as Ethereum and Bitcoin, the next step is to begin to look at the technology behind these digital currencies.

There are a few different types of technology and validation mechanics that are used, each with its advantages and drawbacks – in today’s article, we’re going to take a look at each of these, explaining the subtle differences and what this means for the currencies that use them.

Before we dive into Proof of Stake, the importance of consensus mechanisms and more, be sure to check out the rest of our introductory guides here on the BCB Group website! We’ve got everything you need to get started on our Insights page, so we’re sure you’ll find exactly what you’re looking for in no time!

For a chat with a member of our expert team, simply fill out our online contact form and we’ll get in touch with our best solutions to help you access crypto-friendly business accounts and provide a centre for all your payment needs and trade & source liquidity.

What is a consensus mechanism?

Before we look at how the different types of consensus systems in cryptocurrency work, we thought it would be best to give a basic introduction to the concept first.

So, what is a consensus mechanism?

Basically, it’s a collection of rules, initiatives, and incentives that enable nodes within a blockchain to reach agreements regarding the network. That may sound complex, but what this means to you as a user is that your transactions are safe, secure, and confirmed every time you send or receive any digital currency.

These approaches have been used to achieve consensus among database nodes, application servers, and other enterprise infrastructure components for decades. New consensus techniques have been developed in recent years to allow cryptoeconomic systems like Ethereum to agree on the state of the network.

In a cryptocurrency system, a consensus mechanism also aids in the prevention of certain types of economic attacks. By controlling 51 percent of the network, an attacker can theoretically compromise consensus. Consensus measures are in place to prevent this “51 percent attack.” Different approaches have been developed to address this security issue in various ways.

The two types of consensus mechanisms that you’ll commonly see referenced across the crypto industry as PoW and PoS, or Proof of Work and Proof of Stake.

PoS vs PoW – what’s the difference?

At the time of writing, both Bitcoin and Ethereum are based on a Proof of Work consensus protocol, but Ethereum has laid out plans to upgrade its consensus mechanism to a Proof of Stake model, which will help to streamline the process and speed up the rate at which transactions can be completed and added to the blockchain.

The question that remains is, “what’s the difference?” – to help keep things clear, you can find a jargon-free definition of PoW and PoS below:

How does Proof of Work operate?

Bitcoin and Ethereum both currently use this method of consensus to validate transactions and add evidence to the blockchain, however, there are plans for currencies to stop utilising this method and instead adopt the PoS protocols.

Proof of Work means that the way miners validate blocks and add them to the blockchain – the more work is completed, the longer the chain will be. As a result of this, the chain will have higher block numbers, which in turn adds greater proof and security that all actions within the blockchain are valid, legal, and confirmed.

Ethash, a proof-of-work technique, requires miners to compete in a trial-and-error race to determine the “number only used once” for a block. Only valid “number only used once” blocks can be added to the chain.

A miner will continually run a dataset, which can only be obtained by downloading and running the entire chain , through mathematical processing when racing to build a block. According to the block difficulty, the dataset is used to build a mixHash below a target “number only used once”. Trial and error is the most effective method for doing this.

The target hash is used to determine the difficulty. The smaller the target, the greater the difficulty which can be altered to create more efficiency. . Other miners and clients can easily verify this once it has been produced. Even if just one transaction changed, the hash would change significantly, indicating malpractice.

Hashing makes it simple to detect fraud. However, proof-of-work is a significant disincentive to assaulting the chain as a whole, which adds a heightened level of security for all parties involved in transactions.

What is Proof of Stake?

Proof-of-stake is a consensus method that blockchains employ to reach distributed consensus. Miners demonstrate that they have cash at stake by expending energy through proof-of-work.

Validators stake capital in the form of ether into a smart contract on Ethereum in proof-of-stake. This staked ether is subsequently used as collateral, which can be used to kill the validator if he or she is dishonest or lazy. The validator is then in charge of ensuring that new blocks propagated over the network are correct, as well as periodically producing and propagating new blocks.

The proof-of-stake system has several advantages over the proof-of-work scheme:

  • Far greater energy efficiency — proof-of-work computations do not require a lot of energy.
  • Reduced entry barriers and hardware requirements — exceptional hardware isn’t required to stand a chance of generating new blocks.
  • Reduced centralisation risk – because of the low energy requirement, proof-of-stake should lead to more nodes securing the network.
  • Economic penalties for misbehaviour make 51% style attacks exponentially more costly for an attacker compared to proof-of-work.
  • If a 51% attack were to overcome the crypto-economic defences, the community can resort to communal recovery of an un-tampered chain.

The Pros and Cons of Proof of Work (PoW) and Proof of Stake (PoS) Consensus Mechanics

How does Proof of Work perform as a consensus algorithm?

Pros

  • Due to the operating costs associated with PoW consensus, this form of operation is deemed to be a highly secure way to track transactions.
  • The network is very open and leans towards a heavily decentralised structure, which is the foundation for cryptocurrency’s major benefits.
  • PoW is the only consensus method that’s been utilised and proven to be effective for a long enough period to have successful case studies backing it.

Cons

What difference will the switch to PoS make?

Pros

  • Proof of Stake consensus mechanics allow Validators to add transactions to the blockchain with far more efficiency, both in terms of the level of effort required and the time needed.
  • The environmental impact of PoS is much lower than that of PoW, which means you can stick to green initiatives and reduce the amount of damage caused during the mining process, which is one of PoW’s biggest drawbacks.
  • PoS provides an economic incentive to approve valid blocks, which encourages more Validators to become involved.

Cons

  • As with any new and upgraded technology, one of the major risks associated with PoS is that it has not been fully tested and proved to be a valid, reliable consensus mechanism.
  • PoS setups can lean more towards a centralised structure, which is not best suited to crypto’s DeFi protocols.
  • There are fears that PoS may not be as secure or tamper-resistant as Proof of Work, as it hasn’t been tested and challenged to the same extent that the previous system has.

The BCB Group team BCB Group is the fastest-growing crypto-native provider of business accounts, serving most of the major industry players with access to over 29 fiat currencies.

Here at BCB Group, we’ve got a suite of solutions that helps to keep our clients active, profitable, and secure.. From our industry-leading BCB Business Accounts to our one-of-a-kind instant settlement network, BLINC, we’ll be able to deliver all of your requirements for payments infrastructure.

Get in touch with us online today to discuss growth options for your business or alternatively, stick around in our Insights section to learn more about the cryptocurrency industry.

  • crypto banking partner
  • crypto banking services
  • crypto friendly banking
  • crypto friendly banking services
  • institutional crypto adoption
  • institutional crypto banking
  • institutional crypto interest
Written by
Chris Aruliah

Chris is an industry veteran, passionate about financial innovation, and was previously at Bitstamp, where he held the role of Head of Business Development and was responsible for helping financial institutions enter the crypto market and focused on identifying opportunities for integrating crypto with traditional finance. Prior to that, he launched the open banking payments platform, Token, and built the pipeline for the business in Europe.

This site uses cookies

We use cookies to improve user experience and analyse website traffic. By clicking “Accept“, you agree to our website’s cookie use as described in our Cookie Policy

Accept