One of the fundamental concepts you need to understand to deepen the knowledge of the world of blockchain and cryptocurrencies is that of the so-called Proof-of-Stake (PoS).
To delve deeper into this topic, it is first necessary to know what is meant by blockchain.
The Proof-of-Stake Blockchain: the difference between centralized and decentralized
In itself, a blockchain would simply be, as the name suggests, a chain of linked blocks.
But the fact that a file consists of a chain of blocks, with each new block linked to the previous one, is not in itself so bad.
To tell the truth, since the blockchain is fundamentally used as a form of database to capture, store and read data, there are much more efficient and powerful ways to do this.
The real and unique major advantage of using a blockchain to record data is that in this way the database can be public, shared, searchable and verifiable by everyone, and most importantly can be managed by a decentralized protocol.
Therefore, blockchain only really makes sense if it is used as a ledger for a decentralized protocol, because it does not appear to be a good solution for centralized protocols or infrastructures at all.
But since real blockchains are only decentralized, we need to consider how we can give everyone the opportunity to record their transactions in them without creating confusion and in a way that everyone always respects all the rules.
Blockchain: the Proof-of-Stake (PoS) consensus mechanism
This issue revolves around the so-called consensus mechanism, an automated, open procedure that can be used by anyone without special permissions (permissionless) to validate transactions.
The goal is to ensure that only correct and legitimate transactions are recorded on the blockchain, without relying on any particular individual to approve them.
To be truly decentralized, blockchains cannot have special users with privileges or special power: all users are on the same, identical level, in perfect P2P style.
Consent mechanisms are precisely those procedures, inherent in decentralized protocols, that allow not only the validation of transactions, but also and above all their complete verifiability by everyone.
In the cryptocurrency sector, the most commonly used consensus mechanisms are Proof-of-Work (PoW) and Proof-of-Stake (PoS).
PoW was the first consensus mechanism ever used in the world on what was the first ever decentralized blockchain, that of Bitcoin.
In fact, even the second most important cryptocurrency, Ethereum, was initially based on PoW, but in 2022 it switched to PoS.
The difference with Proof-of-Work (PoW)
PoW is, as the term itself says, based on a proof of work.
Bitcoin transactions are validated by miners, whose job is to search and find the hash code that validates a block. It typically takes about 10 minutes to find it, although this duration depends on the overall hashrate of the network. So it often turns out to be less than 10 minutes, because there is sufficient hashrate on Bitcoin.
The problem with PoW is precisely the hashrate, because mining is essentially a competition where the winner is the one with the most hashrate, therefore effectively rewarding those who have more. However, a higher hashrate also means higher energy consumption, which is why Bitcoin’s PoW consumes a lot of energy.
Another problem is the slowness with which transactions are approved, as it is necessary to wait for them to be included in a valid block and for this block to be mined correctly, and generally it takes at least 10 minutes for this to happen.
The third problem is the cost, which, however, does not depend on PoW, but on the fact that Bitcoin blocks are limited to 1 MB, which means they can hold a maximum of just over 4,000 transactions.
Other cryptocurrencies that use Proof-of-Work in addition to Bitcoin include Litecoin (LTC) and Dogecoin (DOGE), two cryptocurrencies born more than a decade ago, but there is also Bitcoin Cash (BCH) and Ethereum Classic ( ETC). ), born much more recently. In fact, there are more than a hundred, including Kaspa (KAS) and Monero (XMR).
Typically these are first or second generation cryptocurrencies, but not third generation, with a few exceptions.
Ethereum, as already mentioned, initially used PoW, but switched to PoS in 2022.
The main features of Proof-of-Stake
To solve some of the main problems of PoW, Proof-of-Stake was invented.
With PoS there are no more miners and no more need for hash research.
There is no longer even a precise block time anymore, because instead of miners there are validator nodes that can validate blocks in an extremely short time.
There is not even a mention of hashrate, because validating a PoS transaction is technically very simple and fast.
PoS is therefore faster and much less energy intensive than PoW, but that does not mean that the costs are low. In fact, Ethereum still has relatively high fees, albeit lower than Bitcoin at the moment, even though the layer-2 based on PoS now has very low fees.
The way transactions are validated on Proof-of-Stake based blockchains is very simple: validator nodes lock a portion of the network’s native cryptocurrency they own (for Ethereum this is 32 ETH) upon staking, and this way they can validate blocks.
The validator node that successfully validates a block is then rewarded, denominated in the same native cryptocurrency of the network, but if it incorrectly validates or fails to validate a block, it is automatically penalized with a fine.
So it is not useful for validator nodes not to validate blocks or to validate them incorrectly, because they lose. Instead, it’s useful to validate as many of them correctly as possible because they benefit from it.
The differences
Blockchain based on PoW is certainly sturdier and more secure, but also much more energy-intensive and therefore much more expensive.
Today, probably only Bitcoin really makes sense to be based on PoW, while for all other blockchains PoS may be sufficient.
PoS-based blockchain is actually faster, cheaper, less energy intensive, but still quite solid and secure, if designed and managed properly. Additionally, they enable staking, encouraging holders of the native cryptocurrency to lock it in rather than use it.
It is no coincidence that among the top ten cryptocurrencies, excluding tokens and stablecoins, only two are based on PoW (BTC and DOGE), and of these two, only one is a memecoin that may not have a great future ahead of it has (Dogecoin).
There are instead 5 based on PoS (Ethereum, BNB, Toncoin, Cardano and Avalanche), and three others based on consensus mechanisms very similar to PoS (Solana, XRP and Tron) and which have nothing to do with PoW.
The dominance of Proof-of-Stake and similar consensus mechanisms in the crypto space is now almost total, even if this doesn’t include the cryptocurrency that alone is worth more than half of the entire sector (Bitcoin).