Proof of Stake (PoS)
Proof-of-stake (PoS) protocols are a class of Consensus for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of proof of work schemes. The first functioning use of PoS for cryptocurrency was Peercoin in 2012.
Description
For a blockchain transaction to be recognized, it must be appended to the blockchain. Validators carry out this appending; in most protocols, they receive a reward for doing so. For the blockchain to remain secure, it must have a mechanism to prevent a malicious user or group from taking over a majority of validation. PoS accomplishes this by requiring that validators have some quantity of blockchain tokens, requiring potential attackers to acquire a large fraction of the tokens on the blockchain to mount an attack.
Proof of work, another commonly used consensus mechanism, uses a validation of computational prowess to verify transactions, requiring a potential attacker to acquire a large fraction of the computational power of the validator network. This incentivizes consuming huge quantities of energy. PoS is more energy-efficient.
Attacks
PoS protocols can suffer from the nothing-at-stake problem, where validator nodes validate conflicting copies of the blockchain because there is minimal cost to doing so, and a smaller chance of losing out on rewards by validating a block on the wrong chain. If this persists, it can allow double-spending, where a digital token can be spent more than once. This can be mitigated through penalizing validators who validate conflicting chains or by structuring the rewards so that there is no economic incentive to create conflicts.
Variants
Variations of stake definition
The exact definition of "stake" varies from implementation to implementation. For instance, some cryptocurrencies use the concept of "coin age", the product of the number of tokens with the amount of time that a single user has held them, rather than merely the number of tokens, to define a validator's stake.
Delegated proof of stake
Delegated proof of stake (DPoS) systems separate the roles of the stake-holders and validators, by allowing stakeholders to delegate the validation role.
Implementations
The first functioning implementation of a proof-of-stake cryptocurrency was Peercoin, introduced in 2012. Other cryptocurrencies, such as Blackcoin, Nxt, Cardano, and Algorand followed. However, PoS cryptocurrencies were still not as widely used as proof-of-work cryptocurrencies. The biggest proof-of-stake blockchains by market capitalization in 2021 were Cardano, Avalanche, Polkadot and Solana. Other prominent PoS platforms include Tron, EOS, Algorand, and Tezos.
There have been repeated proposals for Ethereum to switch from a PoW to PoS mechanism. In April 2021, the Ethereum Foundation announced that it planned to switch to a PoS system by the end of 2021. This has since been pushed back to the second quarter of 2022.
Concerns
Security
Critics have argued that the proof of stake model is less secure compared to the proof of work model.
Centralization
Critics have argued that the proof of stake will likely lead cryptocurrency blockchains being more centralized in comparison to proof of work as the system favors users who have a large amount of cryptocurrency, which in turn could lead to users who have a large amount of cryptocurrency having major influence on the management and direction for a crypto blockchain.
Energy consumption
In 2021 a study by the University of London found that in general the energy consumption of the proof-of-work based Bitcoin was about a thousand times higher than that of the highest consuming proof-of-stake system that was studied even under the most favorable conditions and that most proof of stake systems cause less energy consumption in most configurations. The researchers also noted that the energy consumption of different proof-of-stake systems was divergent with permissioned systems that used less validators being more energy efficient then permission-less systems that don't. They also couldn't find the energy consumption of a proof-of-stake system on a large scale as such a system does not exist at the time of the report.
In January 2022 Vice-Chair of the European Securities and Markets Authority Erik Thedéen called on the EU to ban the proof of work model in favor of the proof of stake model due to its lower energy emissions.