The blockchain uprising is happening so fast, that it too is being developed. Until now, the de facto mechanism to reach consensus on distributed ledgers has been Proof of Work (PoW), in which workstations compete to elucidate fictitious mathematical complications. However, this system wastes a lot of energy and computer power. But now a quicker, simpler, and more energy-efficient method to run the blockchain has begun called Proof of Stake (PoS).
What is Proof of Stake?
In 2012, an anonymous developer under the pseudonym “Sunny King” co-wrote a paper that described PoS. Unlike PoW, which allows “miners” to “mine” blocks, PoS enables “validators” to “forge” new blocks of transactions only after they stake a certain number of tokens. Validators ultimately earn network fees instead of crypto rewards.
Such a system can deliver a reasonable reward structure by linking the validator’s share of the network to the size of his/her investment. In other words, you invest ten times as many tokens over a competitor, you are ten times more likely to be the validator for the next block. By contrast, in PoW systems, if you invest ten times more in your mining rig, you can truly gain more than 10 times the computational power because of economies of scale.
Proof of Stake drawbacks/concerns:
Risk of oligarchy/centralization— The rich can obviously afford to stake a larger amount of tokens and thus gain more control of the network and earn more fees. However, thanks to the selection methods mentioned above, PoS system is less liable to centralization compared to a PoW blockchain where a few bodies control the most of the mining power.
Menace of losing stake– In a PoW network, the theft of BTC miner’s coins will not affect the mining infrastructure. The miner continues to keep his “vote” in the network and tries to mine the next block.
However, in a PoS network, such a theft could cost a validator his stake in the network and he can no longer be eligible to mint the next block.
Furthermore, a validator requires a “hot wallet” as they need to sign a message from a system connected to the Internet. Thus, this escalates the risk of exposing funds to hackers. And finally, if ‘’slashing conditions” exist, a malicious actor that has cooperated with the validator (but is unable to withdraw funds) could still cause the validator to lose his staked funds.
Ethereum’s planned application of Casper will expectantly solve problems with PoW blockchains: huge energy consumption, mining centralization and high barriers to entry. However, PoS is new and unverified. Given the intricacy and potential risk of unforeseen issues, Ethereum plans to apply PoS in stages: the first stage is Casper release 1, which will offer a hybrid of PoW and PoS in which the system will use PoS to verify every 100th block. After creating constancy, Vitalik aims to move towards a 100 percent PoS-based Ethereum network.