Glossary
Consensus using proof of stake
Proof of stake is a punishment-based consensus mechanism, as opposed to proof of work, which is a reward-based mechanism. When a miner solves the puzzle in a proof of work mechanism, he is rewarded with tokens. If he fails to solve the problem, he suffers no loss other than the computational energy used. What keeps the network secure is the idea that tampering with the blockchain requires a group to control 51% of the network’s total computational power.
In proof of stake, participants need to own tokens beforehand. Then, they will lock such tokens in a smart contract and receive a certain amount of tickets, according to their stake, to participate in a drawing. The more tokens at stake, the greater the number of tickets. Among the holders of tickets, a participant will be drawn at each period to be entitled to place the next block on the blockchain. Such a participant will be rewarded with new tokens.
Proof of stake maintains network security based on the fact that the participant can be penalized. Every new block inserted into the blockchain must be validated by other participants, who can accuse it of tampering. So, if a participant acts maliciously, he can be punished, and his staked tokens can be taken away in a process called ‘slashing’. Network’s security is then maintained by the fact that the participants have financial value at stake.
Additionally, some protocols implement even tighter security measures to prevent tampering. In Ethereum, for example, which migrated from proof of work to proof of stake in 2022, tampering with the blockchain results in the automatic loss of millions of dollars in staked tokens. These measures make this consensus mechanism highly secure.
Unlike proof of work, proof of stake is environmentally friendly. Its operation does not require high computational power since there is no competition between participants to solve any puzzle. One criticism of proof of stake is that a minimum amount of tokens is required to participate in the network, which only allows some to participate. However, this is also true of proof of work. Although individuals can act as miners, the chance of successfully mining new blocks without investment is minimal.
Satoshi Nakamoto could not have used Proof of Stake because it requires users to previously own a certain amount of tokens and the need for those tokens to have some value. If the tokens have little or no value, the possibility of punishment will not serve as a disincentive for malicious attitudes. Once a network becomes valuable, proof of stake becomes a secure and reliable consensus mechanism.
