What is Proof of Stake and why does blockchain need it?
— 25 Mar 2022
If you’re a crypto holder, you’ve likely heard of Proof of Stake (PoS). But what is it, and why do some people think it’s necessary for the future of cryptocurrency? In this blog post, we’ll explore PoS and its potential implications for the crypto world. Whether you’re a skeptic or an advocate, read on to learn more about this emerging consensus algorithm.
Proof of Work vs Proof of Stake: what’s the difference?
Proof is basically a consensus mechanism that keeps blockchains secure by allowing only genuine users to add new transactions. The idea is that computers (nodes) agree on which block to accept into the blockchain. Sometimes there are 2 blocks of transactions published at the same time and nodes have to agree on an order. This is a kind of voting game. But in this voting game, who gets a vote? 1 person = 1 vote seems like a fair solution, however it doesn’t work like that here since there is a need for some kind of authority or mechanism to say who these humans are.
What if you don’t have that proof? Then bad actors can come in with a virtual machine that has 10 billion virtual nodes and then say they are 99% of the network and should control everything. To prevent this, what Proof of Work and Proof of Stake both do is say that the weight of your vote in the consensus is proportional to what quantity of economic resources you bring into the blockchain.
In the case of Proof of Work, your economic resources are computers and you prove that you have them by running them 24/7. In Proof of Work networks, computers compete against each other to be the first to solve complex puzzles. This process is called mining.
Mining solves the problem of blockchain safety because in order to attack and control the network, you have to control more computers and that’s extremely expensive.
In Proof of Stake, instead of relying on people with computers that are just constantly cranking out hash 24/7, you just use holdings of coins inside the system. The weight of each validator’s vote depends on the size of its deposit — stake. So your amount of crypto coins measure your participation in agreeing on transactions.
Who wins in the PoW vs PoS battle?
Both Proof-of-Work and Proof-of-Stake have their pros and cons, and depending on your point of view, you can find arguments that prove you’re right. For example, the popular argument that Proof of Work consumes a huge amount of energy. It may be true that a single transaction on the Proof of Work network requires more energy than an entire household in 24 hours. But it’s also true that in a given year, the entire network uses 10% less energy than holiday lights. Depending on how things are framed anyone can argue that mining is either a useless waste of energy or the greener use of energy.
At the moment, Ethereum is still operating on a Proof of Work basis, but soon it will switch to Proof of Stake (PoS). The transition to the Proof-of-Stake consensus mechanism will not only reduce energy consumption by 99% but also lower the gas fees, something that all Ethereum users are waiting for.
There is a hope that other cryptocurrencies will follow the example of Ethereum, and in the future this will become the new trend. However, we must say that PoS is not the perfect solution and also has its drawbacks. For example, validators with large holdings can have excessive influence on transaction verification. This means that Proof of Stake is likely to be significantly less democratic.
Polygon Proof of Stake: how does it work?
Polygon is a Proof-of-Stake network that randomly selects stakers to validate new transaction data. Anyone with a sufficient amount of tokens can lock up their ETH and have a vote in the network.
When a block of transactions is ready to be processed, the cryptocurrency’s Proof-of-Stake protocol will choose a validator node to review the block. The validator checks if the transactions in the block are accurate. If so, they add the block to the blockchain and receive crypto rewards for their contribution.
What if someone cheats? If someone cheats or performs any type of fraud, the validator loses some or even all of his staked holdings as a penalty. Ouch. This is a pretty good motivation to follow the rules of the game.
Polygon allocates 12% of its total supply of 10 billion tokens to fund the staking rewards. This is to ensure that the network is seeded well enough until transaction fees gain traction. These rewards are primarily meant to jump-start the network. While the protocol in the long run is intended to sustain itself on the basis of transaction fees.
At Tapmydata, we’re excited to explore all the possibilities staking can bring to our users. That’s why we’re launching a Single Sided Staking platform where TAP holders will be able to stake their TAP tokens and earn a TAP return on the fees generated by the Tapmydata ecosystem. We’ll announce the launch soon, so don’t miss out.
- PoW and PoS are consensus mechanisms that keep blockchains secure by allowing only genuine users to add new transactions.
- A Proof-of-Work consensus mechanism requires members of a network to expend effort solving mathematical puzzles to prevent anybody from gaming the system.
- In Proof-of-Stake network crypto holders validate block transactions based on the number of coins a validator stakes.
- Both mechanisms have proven to be successful at maintaining blockchains, though they each have drawbacks.
- PoW drawbacks — high energy consumption and e-waste.
- PoS drawbacks — hasn’t yet been fully tested and proven at scale, can lean toward centralization.
- Polygon’s Proof-of-Stake model allows owners of a cryptocurrency to stake coins and create their own validator nodes.