What Is Proof Of Stake? How to Become a Rewarded Validator

Proof of Stake (PoS) has proven itself to be a reliable, energy-efficient, and, most importantly, accessible method for processing cryptocurrency transactions.

Every time a person buys, sells, or trades crypto on a blockchain, the transaction must be verified to ensure no foul play has been committed. Methods for achieving this have been around since the early days of Bitcoin (BTC), and nowadays, there are plenty to choose from, such as proof of work and proof of authority.

Proof of Stake is particularly popular because it modernizes the process of authorizing crypto transactions and blockchain data, making it easy to understand and participate in. 

What Is Proof of Stake?

Like other blockchain consensus mechanisms, the primary goal of Proof of Stake is to approve and verify all distributed data, primarily crypto transactions, that flows through the blockchain. 

As a reminder, blockchains are the digital databases where all these transactions occur. Since many blockchains are designed to be decentralized, meaning they don’t rely on banks or central authorities, PoS has allowed blockchains to instead register these transactions locally without needing a third party’s involvement.

So when people talk about the Proof of Stake consensus, they are essentially referring to the process of collecting transaction data, getting someone to verify it, and then creating a new block of transactions to add onto the blockchain. 

Still, Proof of Stake wasn’t the first consensus mechanism. It would be years after the emergence of its counterpart, Proof of Work, that PoS would finally make an appearance.

Where Did Proof of Stake Come From? 

Proof of Stake would earn its name from a 2012 academic paper by Sunny King and Scott Nadal . The paper proposed PoS as an alternative to Proof of Work which was coming under fire for its heavy energy consumption.

That same year, King founded Peercoin, a network that initially used a hybrid model of PoW and PoS. However, it was still officially the first crypto to implement PoS and use it in practice.

Blackcoin arrived in 2013 and went all in with its Proof of Stake system, proving to future developers that the model could work without having to rely on PoW to help it function.

In 2014, several other developments occurred, which have proven instrumental in developing Proof of Stake. One of the biggest examples of this was the introduction of Slashing by Ethereum (ETH) co-founder Vitalik Buterin , which was designed to penalize validators on the network who act irresponsibly while verifying data. 

How Does Proof of Stake Work?

First, it’s important to define what staking is since this activity is at the core of PoS and allows it to function at all.

Staking is when a network participant locks up their crypto assets for a specific period. Usually, this is in exchange for rewards. Still, developers soon realized that staking could also be used to decide who is eligible to become a ‘validator,’ which verifies transactions on the blockchain.

Now that we understand staking let’s take a deeper look at Proof of Stake and run through how it works step-by-step:

1. Participants stake the required amount of tokens to become eligible as a potential validator.
2. Nodes, computers scattered across the network, compete with one another to push through a new batch of transactions.
3. The network then randomly chooses from the pool of people who staked to decide who will validate said transactions.
4. The validator is then in charge of ensuring the transactions are fair and legitimate and aren’t being used for fraud or devious activities.
5. Once the transactions are clear, the block is finalized and added to the ledger, and the validator is rewarded for their effort.

Validator Rewards 

Though validators are always compensated in the Proof of Stake algorithm, rewards are only unlocked once the network double-checks the block and its transactions.

It needs to be prefaced that the type of reward can vary depending on the network. Most of the time, though, the validator reclaims their staked tokens alongside a few extra tokens and a percentage of the transaction fees as a reward. 

Staking Pools 

Another feature that some Proof of Stake, though not all, blockchains will deploy is staking pools. These pools give users who may not be fully confident about becoming validators or who don’t have the tokens to reach the required staking amount an alternative option to partake in the process. 

It works because participants will stake their tokens into a pool. No minimum amount of staked coins can be put down here, making the pools accessible to everyone on the network.

A pool operator manages the pool of coins, validating transactions and creating new blocks on behalf of the participants.

The rewards will then be shared out to everyone involved who will be awarded the equivalent of the amount they originally staked.

How Secure Is a Proof of Stake Model?

Of course, the whole process of a consensus algorithm like PoS is to ensure the accuracy and safety of crypto transactions, but the validators themselves also need to be trustworthy.

With Proof of Stake, validators are essentially forced to put their money, or digital assets in this case, where their mouth is since they need to deposit a decent amount of their own currency to validate. Additionally, there are severe punishments for any validators who are caught misbehaving, including the confiscation of their own tokens.

This encourages trust between validators, ensuring they are all on the same page and aren’t looking to meddle with the network in any suspicious ways.

This also means they can form a defensive blockade against attackers. For example, if someone were trying to take over the majority of nodes to radically change the network, the honest validators would need to vote to disregard the alterations, returning things to normal.

Benefits and Drawbacks of Proof of Stake

Despite plenty of consensus algorithms out there, Proof of Stake has proven to be efficient in many different areas, which has helped make it as appealing as possible. Still, that isn’t to suggest that there aren’t still a few lingering problems that have cropped up over the years.

Pros

• Energy-Efficient: Other consensus mechanisms, primarily Proof of Work, catch a lot of flak for the staggering amount of energy that goes into their mining processes. This isn’t the case for PoS since it doesn’t involve complicated cryptographic puzzles that need to be solved to verify a block, and as a result, it uses up far less energy. 
• Trustworthiness: Forcing validators to stake tokens creates a bridge of trust since they could face losing their tokens if they don’t act appropriately.
• Accessibility: You don’t need a supercomputer or years of coding experience to be a Proof-of-Stake validator, just a few tokens.
• Scalability: Proof of Stake sharding is a process of splitting blocks horizontally to free up space and improve the network’s scalability and speed.
• Decentralization: Since Proof of Stake solely relies on network participants and not third parties, it allows the users to enjoy financial freedom in a decentralized setting.

Cons

• Validator Power: Validating power could face the issue of centralization by a few select individuals if they have enough tokens to keep staking high amounts continuously. 
• Minimum Staking Requirements: Some Proof of Stake blockchains will require users to stake a minimum amount to be eligible for validation, which tends to be quite high. While this does confirm a person’s trust, it comes at the cost of locking some people out. This is why staking pools are essential as an alternative entry point, though they still don’t allow people to become validators themselves.
• The “Nothing at Stake” Problem: This refers to when a validator decides to validate transactions on multiple forks. There’s no cost for mining on PoS, so it’s in the miner’s or validator’s best interest to work on both forks simultaneously to ensure they don’t lose their reward. However, this also increases the risk of double spending if attackers begin to catch on, which generally causes disruptions in the transaction process system. 

Different Variants of Proof of Stake

Though Proof of Stake has had time to evolve and adapt, some developers have conjured up their own versions that suit their blockchains a little better. Here are some of the biggest examples:

• Cardano and Ouroboros: The first provably secure Proof of Stake protocol which combines unique technology and mathematically-verified mechanisms to provide an extra layer of security.
• Near and Thresholded Proof of Stake: Deterministic method of making decisions during specific time intervals.
• Algorand and Pure Proof of Stake: Staking requirements are much lower, and validators are chosen at random, though their stake size is still taken into account.
• Polkadot and Nominated Proof of Stake: Network participants can ‘nominate’ someone to become a validator through staking coins. They will earn rewards if their chosen validator acts sensibly.

Delegated Proof of Stake 

Delegated Proof of Stake is a particular variant that has gained much traction and is being accepted by BitShares, EOS, and TRON.

It was first introduced by software engineer David Larimer in 2014 , and as the name implies, it’s all based around the idea of ‘delegating’ a validator.

Under this system, the validators can be seen almost like town mayors. The users can stake their tokens to ‘vote’ the validator in, but they can also vote the delegator out if they are worried about malicious activity.

This ensures the validators never miss a beat or get any funny ideas about fooling around since they’ll always be on a tight leash .

If the delegate survives the verification process, though, they will share their rewards with all of their sponsors.

On the Flipside

• The truth is, Proof of Stake is still fairly young in the grand scheme of things. We, therefore, need more time to figure out all of its limitations, and though it’s proven that it can work on large-scale projects like Ethereum, whether it’ll survive in the long term is still uncertain. 

Why This Matters

Proof of Stake is modernizing the cryptocurrency transaction process for blockchains. Sure, it definitely still has a few limitations, some of which we aren’t even aware of yet, but it also has a low barrier of entry and does away with all the complex cryptography and intense computing power. 

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