What is Proof of Stake?

You may have heard of Ethereum’s transition to Proof of Stake. It’s been a long time coming and the hype is epic, but what’s it all about?

Interconnected pawns

First, bear in mind that PoS is not just about Ethereum, and it’s nothing new. Fully operational PoS blockchains include Avalanche, Polkadot, and Cardano, with others, such as Dogecoin, already lining up.

This article explains the Proof of Stake process, lists the expected consequences of the Ethereum transition for the average user, and discusses possible next steps, both for Ethereum and PoS itself.

How is Proof of Stake different from Proof of Work?

Both Proof of Work and Proof of Stake are consensus mechanisms that secure and decentralize networks, ensuring that no illegitimate transactions occur on the blockchain.

Proof of Work, the validation method used in Bitcoin and the majority of cryptocurrencies, relies on miners who verify each transaction with their computational power. Proof of Stake replaces that system with a network of validators who have staked enough coins to activate validator software. In the case of Ethereum, it’s 32 ETH.

The process of validating a transaction in PoS is called forging. The longer the validator is active and the bigger their stake, the more likely they are to receive a task. That said, it’s difficult to predict who will forge a given transaction, because the election mechanisms are highly randomized.

How secure is Proof of Stake?

In Proof of Work, the mining process produces more cryptocurrency to reward the miners. In Proof of Stake, validators are rewarded with transaction fees.

If a node validates a wrong transaction, their staked coins can be confiscated and their validator status revoked. The responsibility for flagging malicious activity rests on other nodes.

In PoS, mounting a 51% attack is even more difficult and risky than in PoW due to the very large stake an attacker would have to amass. What’s more, a 51% attack would likely result in a massive drop of the coin’s value, so there’s very little incentive to try.

How can Proof of Stake affect the community?

Due to the popularity of Bitcoin, the primary PoW cryptocurrency, mining has become highly professionalized. Many casual users don’t even know the PoW validating process in detail. It’s all happening behind the scenes.

Proof of Stake is a different story. To become a validator, you don’t need any special infrastructure. All you need to do is stake a set amount of coins. PoS proponents praise this as a shift toward a greater community engagement and a more egalitarian crypto.

Source: beaconcha.in/charts

A lot of people are asking if Ethereum’s transition to PoS will reduce gas fees. While the merge itself isn’t expected to do that, another development currently in the works, sharding, just might. Once implemented, sharding will mitigate network congestion and increase the number of transactions per second by creating new chains, known as shards, which in turn should push down gas fees. Sharding on Ethereum could become a reality sometime in 2023.

Is Proof of Stake environmentally-friendly?

In Proof of Work, mining new coins and validating transactions in the process takes enormous amounts of energy, and if that energy is sourced from fossil fuels, the resulting carbon footprint equals those generated by medium-sized countries.

Proof of Stake eliminates the source of that problem. According to Ethereum’s estimates, once the mainnet moves to PoS, the network’s energy consumption will drop by 99.95%. Preliminary calculations suggest that Eth2 will use approximately 2.62 megawatt, the equivalent of “around 2100 American homes”.

Source: Ethereum Foundation

Could PoS be the future of crypto?

The driving force behind Ethereum’s transition to PoS was its founder, Vitalik Buterin. Now that the merge is on the brink of completion, Buterin advocates PoS outside of Ethereum. He confirmed his direct involvement in Dogecoin’s migration effort. It’s not an easy process, but Buterin is a firm believer.

He could soon be proven right. As climate action picks up speed, the opposition to energy-intensive industries grows louder. The EU’s Markets in Crypto-Assets bill came pretty close to imposing sustainability standards on crypto, which industry experts denounced as a de facto Proof of Work ban.

In the end, the amendment was dumped on the grounds that it stifles innovation, but Yu Xiong, a business analytics professor at the University of Surrey, called the vote a “warning”, adding that the sector should “prepare for transformation”.

Will Bitcoin ever switch to Proof of Stake?

It’s unlikely that Bitcoin will pivot to PoS in the foreseeable future. It would be a colossal effort, and it’s unclear who could lead the way. Even if someone did set out to try, they would face a very strong opposition from the mining industry.

However, if the Ethereum merge is successful and proves beneficial, or if the social and political pressure to reduce emissions grows even bigger, Bitcoin evangelists and early adopters could start wondering if the status quo is really worth preserving.

Still, it would take years for Bitcoin to even start the process Ethereum needed years to complete.