4min read
Published on: Apr 22, 2024
#Blockchain
2022 was a momentous year for the crypto industry as the world’s second largest cryptocurrency, Ethereum (ETH), made the transition to the proof of stake (PoS) consensus mechanism during the Merge upgrade.
The decision created a storm in the Web3 world as Ethereum forms the backbone of several leading blockchain projects.
In turn, it also created interest in PoS, a consensus mechanism considered environmentally sustainable yet only rarely utilised.
There are primarily two types of crypto mining:
Even today, PoS is not as popular as proof of work (PoW), especially among crypto-focused blockchains.
Nonetheless, PoS is gaining currency among blockchains that are facilitating the development of decentralised applications (dApps).
Today, we will explore the PoS consensus mechanism in detail, a prominent technology of the Web3 economy.
The proof of stake (PoS) consensus mechanism was created as an alternative to the proof of work (PoW) mechanism in order to address the growing concerns around the adverse environmental effects of the latter.
In PoS, validators are chosen based on the number of tokens they have stoked.
This is unlike PoW where an individual’s computing capacity matters the most and who is required to solve cryptographic puzzles.
Here is how it happens.
Those holding tokens of a cryptocurrency stake a specific number of tokens or offer them as collateral.
For instance, a token holder on the Ethereum blockchain needs to stake 32 ETH in order to potentially become a validator.
This way, these individuals emerge as potential validators who can validate blocks and earn rewards in terms of fees.
The PoS blockchain selects the validator randomly who will confirm the new transaction and collect fees.
Several validators are required to validate a block. Once these validators confirm the validity of a block, it is added to the blockchain.
You would be surprised to learn that a cryptocurrency used a PoS consensus mechanism nearly ten years earlier than Ethereum’s transition to PoS in 2022.
It was Peercoin that first used PoS in 2012.
The primary aim of PoS is to address the challenge of environmental sustainability associated with PoW.
In essence, it is the number of staked tokens, instead of computing power, that determines your chances of getting permitted to verify a block and earn rewards under PoS.
The transition to PoS helped Ethereum cut down its energy usage by 99%.
In fact, a 2021 study by the University of London concluded that Bitcoin’s energy consumption, a PoW blockchain, was approximately 1,000 times higher than that of those PoS blockchains that are the most energy-intensive among this category.
Even though conservative in terms of energy usage, PoS is considered to be an unintentional harbinger of centralisation to blockchain technology.
It is so because PoS incentivises those validators who hold and stake a large number of crypto tokens.
Nonetheless, the lure of an energy-intensive mechanism is so much that Erik Thedéen, the-then Vice Chair of the European Securities and Markets Authority (ESMA), proposed in 2022 that the European Union ban the PoW and instead allow PoS for blockchain technology.
It is time that we list down both the advantages and disadvantages of PoS so that you can decide if the move to PoS is a safe bet.
Pros | Cons |
Highly energy-intensive and lessens network congestion. | Not considered to be very secure. |
Facilitates faster and economical transaction processing. | Can potentially lead to centralisation of the blockchain tech. |
Allows participants with usual computing equipment. | Requires participants to own and stake a large of crypto tokens. |
PoS | PoW |
Used for validating crypto transactions. | Used for mining crypto. |
Block creators are called validators. | Block creators are called miners. |
Rewards validators with transaction fees. | Rewards miners with newly minted crypto tokens. |
Requires users to stake a specific number of crypto tokens. | Requires users to own high-tech computing equipment. |
Environmentally sustainable. | Often criticised for being energy intensive. |
Vulnerable to becoming highly centralised. | Remains as decentralised as a mechanism can be. |
Since most projects wish to comply with the emerging environmental regulations, they prefer PoS blockchains instead of PoW ones.
In addition, it is cost-effective to develop on PoS platforms because it consumes less energy.
It was for the same reason that the second-largest cryptocurrency Ethereum transitioned from PoW to PoS during the Merge upgrade in 2022.
Ethereum is a leading L-1 blockchain that has emerged as the hottest host to several prominent L-2 blockchain projects.
Recommended Read: Layer-1 Blockchain Explained
We recommend that BitDelta users should learn about both PoS and PoW consensus mechanisms and their evolving functions in blockchain technology.
It would help you assess a cryptocurrency as a potential investment instrument.
Stay tuned to the BitDelta Academy to learn more about the fundamentals of blockchain technology and crypto economy.
Leading cryptocurrencies based on the PoS mechanism such as ETH and Cardano (ADA) are available to our users for trading on the BitDelta app.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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