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What are Proof-of-Stake Blockchains?

Another consensus mechanism that has gained popularity in recent years is PoS. It was designed as an alternative to Proof-of-Work blockchains with a different set of features and tradeoffs. It is not the ‘magic solution’ to decentralization or security, but it is a very important alternative system. 

What PoS does is to ensure higher speed, high scalability, make energy consumption more efficient and provide a more affordable entry threshold for users. Some examples of major projects already using PoS are Solana, Polkadot and Cardano. Ethereum, which launched as a Proof-of-Work chain, is also now a leading PoS protocol.

How does PoS work?

PoW networks have miners validating transactions. PoS networks have validators processing transactions. These validator nodes confirm that network data is accurate (similar process to what miners do in PoW networks, only the energy consumed for processing is reduced). Instead of putting effort into solving ‘proofs of work’, as miners do, validators have to ‘stake’ assets with a certain number of blockchain tokens required per network. This staking earns rewards and makes them eligible to be selected as nodes validating transactions.

The system randomly chooses a validator to confirm the data contained in a block. However, despite the random nature, certain variables will make a validator have a higher probability of being chosen (e.g. if he stakes a larger number of tokens).

When a block is confirmed, that validator is rewarded with the transaction fees found in that block, then the process starts over with a new block.

How is a PoS network secured?

By asking validators to ‘stake’ a certain number of tokens, the system ‘forces them to put their skin in the game’. If a validator behaves in an incompetent or malicious way, they lose their tokens and access to the network. This process is called ‘slashing’, which translated word-for-word, in this context, would mean ‘cutting’, ‘violent blow’, ‘cutting’, ‘hitting mercilessly’. Therefore, validators have much more to gain if they act honestly.

Although in terms of sustainability it can be said that PoS is better than PoW, Proof-of-Stake is criticized for favoring plutocracy (a form of government in which state power is concentrated in the hands of the richest), because the validators who put at ‘stake’ a greater number of tokens acquire greater influence in the network. One primary difference between PoW and PoS networks, however, is the validator energy consumption. PoW derives its security from extensive computational consumption of energy, while PoS validators consume much less energy. This feature has led many researchers to label PoS as more environmentally friendly, but this issue is debated hotly.

PoS and PoW are not designed to replace each other. Instead, they are very different approaches to public, decentralized networks with many different features and tradeoffs.