Proof of Stake is an alternative method to Proof of Work (PoW) to validate transactions on the blockchain.
The world’s first blockchain, Bitcoin, has always been based on PoW, but this method is relatively slow and, above all, very expensive. In fact, to make a PoW-based network secure, miners need to do a lot of work, and this work consumes electricity.
The Proof-of-Stake (PoS) Based Consensus Mechanism
To speed up and, above all, make the validation of blockchain transactions consume less energy, Proof of Stake was invented, that is, an alternative validation method to PoW.
PoS does not require miners to do any work, so much so that it does not even require the existence of miners. In fact, when Ethereum switched from PoW to PoS in September 2022, ETH mining simply ceased to exist forever.
The concept behind PoS is that those who want to participate in the validation of transactions (the so-called validators) must stake their cryptocurrencies to increase the chances of generating a block.
In fact, it is the validators who have staked, or staked, their cryptocurrencies that generate the blocks that validate the transactions by adding them to the blockchain. In exchange they receive a prize.
Betting on Nodes
PoS-based networks work well if many holders of the network’s native cryptocurrency stake many of their coins. For example, there are over 28 million ETH staked on Ethereum, out of approximately 120 million ETH in the world.
The original PoS simply requires validator nodes to stake their cryptocurrencies on their own node, and to incentivize them to stake many of them, mandatory minimums are often introduced. To run an Ethereum validator node, you need to stake 32 ETH, which is equivalent to almost $63,000.
This effectively excludes the possibility of small ETH holders having a validator node, and thus staking as a service was born, i.e., nodes that also allow other coin holders to add their own coins to stake on the node. This service is offered, for example, by many exchanges or decentralized services such as Lido.
Leased Proof-of-Stake (LPoS)
Staking as a service in traditional PoS is offered by private initiatives that allow third parties to stake their coins on the node owned by those who offer the service. However, there are some networks, such as Tezos and Waves, that are not based on simple PoS, but on LPoS.
LPoS is a variant of PoS that nativizes the lending of coins to nodes, basing it on a decentralized system, unlike stake-as-a-service, which is generally based on centralized services.
Those who lend coins to LPoS nodes can always withdraw them freely, precisely because the system is decentralized and therefore withdrawal cannot be blocked. In fact, the rented coins never leave the user’s wallet, who simply connects the node to his wallet, without transferring their coins to the node.
Delegated Proof of Stake (DPoS)
There is also a third variant of Pos, namely the so-called Delegated Proof-of-Stake (DPoS), in which validator nodes are selected through a kind of election, throughout the network, thanks to a system of representative democracy. Users cast their votes by staking their coins.
Ethereum has shown that PoS alone is not really capable of reducing transaction fee costs, while Tron has shown that DPoS can reduce them significantly. If lately the median average transaction fee on Ethereum is around $3, on Tron it is around $0.1, and this makes the difference very evident.
By Audy Castaneda