What Proof of Stake (POS) Is, Why Staking Exists and How It Benefits Users

What Is Proof of Stake?

Proof of Stake (PoS) is a consensus mechanism used to validate new transactions and propose new blocks in blockchain networks. In PoS, validators are selected based on the amount of cryptocurrency they "stake" in the network, instead of relying on the computational power of miners — as seen in energy-intensive mechanisms like Proof of Work (PoW).

PoS validators are coin owners who offer their assets as collateral, in a process called crypto staking, to earn the right to verify new transactions and receive rewards. The committed stake can be considered as a validator’s “skin in the game”, as their stake can be slashed if they make mistakes in block verification, or have extended down-time. This consensus mechanism ensures security and integrity within the blockchain while facilitating faster and more efficient transactions. Several blockchains, including Ethereum, Solana, and Cardano, have adopted the Proof-of-Stake consensus mechanism. 

What Is Staking?

In the context of consensus mechanisms, crypto staking refers to the process of locking up cryptocurrency in a PoS network to participate as a validator. Staking enables validators to add new blocks to the blockchain and earn rewards (typically in the network’s cryptocurrency). The more a user stakes, the higher their chances of being selected as the next validator to propose and verify the next block of transactions.

Staking can be highly rewarding, offering returns of up to 10% or more depending on the blockchain. However, staking requires a level of commitment, as the staked crypto is illiquid for a fixed period, during which it cannot be traded or withdrawn.

For users who don’t wish or lack the expertise to run their own validator node, you can still participate in staking through staking pools or delegated Proof of Stake (DPoS) networks. In a staking pool, multiple users combine their crypto to increase their chances of earning rewards, which are then distributed proportionately among participants. In DPoS networks, users can ‘delegate’ their tokens to a preferred validator, allowing those validators to use the combined stakes to propose and validate new blocks.  This allows small-scale token owners to participate in the staking process and earn passive income from their idle crypto assets.

Benefits of PoS

Proof of Stake was designed to address the drawbacks of the Proof-of-Work consensus mechanism. Below are some of the advantages of the PoS consensus mechanism.

Energy Efficiency

One of the main benefits of PoS is its energy efficiency. PoW blockchain networks, like Bitcoin, require vast amounts of computational resources and energy. PoS blockchains, on the other hand, enable validators to operate with significantly lower energy consumption. This makes PoS an environmentally sustainable alternative, especially as the number of blockchain networks continues to grow.

Inclusivity

Another advantage Proof of Stake has over Proof of Work is inclusivity. In PoS networks, anyone with a certain amount of cryptocurrency can participate as a validator, reducing the need for expensive mining hardware as in PoW blockchains. DPoS mechanisms also allow small holders to delegate their tokens and still participate in protocol staking. This enables more users to contribute to network security and decentralization — all while earning a reward in return.

Security 

Robust security is a highlight feature of most PoS blockchains. While the 51% attack is still possible with Proof-of-Stake networks, it would require owning more than half of the staked assets. Moreover, validators who act in bad faith or approve fraudulent transactions risk losing their staked assets, as honest validators could vote to burn the offenders’ assets. This financial risk discourages exploits and ensures that validators work in the network’s best interest. 

Scalability

PoS networks are more scalable than their PoW counterparts. By minimizing the computational demands, PoS facilitates faster and more efficient processing of transactions, which is crucial for blockchain projects, such as decentralized exchanges, decentralized applications (dApps), and non-fungible tokens (NFTs). As the user base on PoS blockchains expands, scaling solutions help them accommodate higher transaction volumes without slowing down.

Cons of PoS

Centralization

PoS can lead to centralization because those with more tokens are more likely to have greater influence over the network, through being selected more often as the next validator. Wealthy stakeholders may have disproportionate control, which can undermine the decentralized nature of the blockchain.

Complexity and Technical Barriers

Users may find the technical aspects of staking and running a validator node complex, which could discourage participation. This is particularly true in maintaining high uptimes, as there is a risk of being slashed if their nodes are not resilient. This barrier may limit the diversity of users involved in network governance.