Proof of Stake

Every blockchain needs a way for thousands of strangers to agree on which transactions are real, without a bank or central authority making the call. Proof of stake is one of the most popular ways to reach that agreement. Instead of burning electricity to compete, participants put their own crypto on the line to earn the right to help run the network.

If you have ever heard of staking or wondered how networks like Ethereum, Solana, or Cardano stay secure, proof of stake is the answer.

What Does Proof of Stake Mean?

Proof of stake (often shortened to PoS) is a type of consensus mechanism, the set of rules a blockchain uses to agree on its history. In a proof of stake system, people called validators lock up, or stake, some of the network's native cryptocurrency. The protocol then selects validators to propose new blocks and to check blocks proposed by others. Honest validators earn rewards, while those who cheat or break the rules can lose part of their stake.

Think of it like a security deposit when you rent an apartment. You hand over money up front, and you get it back with no problems as long as you follow the rules. If you damage the place, the landlord keeps some or all of the deposit. Validators put down a similar deposit, which gives them a strong financial reason to behave honestly.

How Proof of Stake Works

The details vary from one blockchain to another, but most proof of stake systems share the same basic steps.

Staking

To become a validator, you lock a certain amount of cryptocurrency in a special contract or account. On Ethereum, for example, running your own validator requires a deposit of 32 ETH. This stake acts as collateral and also determines how much influence you have on the network.

Selecting Block Proposers

The network regularly chooses a validator to propose the next block. Selection usually involves a degree of randomness, often weighted by how much each validator has staked. Other validators then review the proposed block and vote, or attest, that it is valid. Once enough of the total stake agrees, the block becomes part of the chain.

Rewards and Slashing

Validators earn rewards in the form of newly issued coins and a share of transaction fees. If a validator tries to cheat, for example by approving two conflicting blocks, the protocol can destroy part of its stake and remove it from the validator set. This penalty is called slashing. Validators that simply go offline usually face smaller penalties for missing their duties.

Proof of Stake vs Proof of Work

Proof of stake was designed as an alternative to proof of work, the system Bitcoin uses. The two approaches secure a blockchain in very different ways:

• Energy use: Proof of work relies on miners running powerful computers around the clock, while proof of stake needs only ordinary servers. When Ethereum switched to proof of stake, its energy use fell by more than 99%.
• Security model: In proof of work, attackers need a majority of the network's computing power. In proof of stake, they would need to control a large share of the staked coins, which would be extremely expensive to acquire.
• Hardware: Mining usually requires specialized equipment, while staking can often be done with a regular computer or through a staking service.
• Track record: Proof of work has secured Bitcoin since 2009, while large-scale proof of stake networks are younger and still evolving.

Ethereum and the Merge

The most famous move to proof of stake happened in September 2022, when Ethereum completed an upgrade known as the Merge. Ethereum's original proof of work chain joined with a separate proof of stake chain that had been running alongside it, and mining on Ethereum ended. The switch happened without interrupting the network or changing users' balances.

Since then, Ethereum has become one of the largest proof of stake networks, with a very large number of active validators spread around the world. Its transition showed that a major blockchain could change its consensus mechanism while continuing to operate.

Variations of Proof of Stake

Not every proof of stake network works the same way. Some common variations include:

Delegated Proof of Stake

In delegated systems, coin holders vote for a smaller group of validators to produce blocks on their behalf. This can make the network faster, but it concentrates power in fewer hands.

Delegation and Liquid Staking

Many networks let you delegate your coins to a validator without running one yourself, sharing in the rewards in return for a fee. Liquid staking services go a step further by giving you a token that represents your staked coins, which you can trade or use elsewhere while your original coins stay staked. You can read more in our guide to staking.

Risks and Criticisms

Proof of stake has clear advantages, but it also has trade-offs that are worth understanding before you get involved. Critics point out that people who hold the most coins earn the most rewards, which could concentrate influence over time. Large staking providers and exchanges can end up controlling a big portion of the stake, raising questions about decentralization.

If you stake, your coins may be locked for a period and you might not be able to sell them quickly when prices move. Choosing a poorly run validator can lead to missed rewards or slashing penalties, and liquid staking adds smart contract risk. Rewards are never guaranteed, and the value of the coins you stake can fall.

Useful Links

• What is staking?
• What is Ethereum?
• Can the blockchain trilemma be solved?
• What is a validator?