How Proof of Stake Mechanism Will Revolutionise The Crypto Space?

By July 29, 20212 Comments

The whole crypto community has torn apart a never-ending debate of a superior algorithm between Proof of Work (PoW) and Proof of Stake (PoS) consensus models. And while Proof of Stake is a solid choice in itself, it is important to compare it with Proof of Work to understand its revolutionary potential truly.

Even though it seems that new developers are actively choosing PoS over PoW, we must be educated enough to understand why that is. Right now, many myths are spreading around about PoS that deserved to be addressed for a fair appropriation concerning all staking consensus. 

But first, it is imperative to understand what exactly is PoS consensus in the first place.

Proof of Stake explained

Proof of Stake, just like Proof of Work, is used to maintain a consensus across a blockchain and maintain its secured ledger, but with comparatively less work, at least in the way work is conventionally regarded. Unlike in PoW, instead of using specialized mining gear, a miner who wishes to contribute to the network as a validator needs to stake an amount of cryptocurrency they want to mine. All of these are very important terms and form a key part of the Proof of Stake consensus.

A validator’s stakes are usually locked and can be considered refundable interest-bearing deposits to prove that the concerned party has a vested interest in the network. Hence, to mine cryptocurrencies in PoS:

  • One must buy it, 
  • stake it and lock it for a particular period and 
  • continue mining in return for interest on deposits. 

But in PoW networks like Bitcoin, a miner needs to select to add a node to the blockchain, which is selected on criteria that differs from blockchain to blockchain, but whatever method is used, heavy electricity and computation power are required. Additionally, the chosen lucky miner gets all the transaction fees from this new block. 

Therefore, this makes almost every computer with the internet capable of staking and validating transactions, but on the other hand, in the case of PoW, it depends on the complexity of encryption algorithms. But with a lack of work, the rewards are mined and distributed proportionally across the network, and hence the rewards are considerably lower in PoS.

How Proof of Stake Mechanism is Better Suited For the Future of Crypto

Environmental Concerns

Lately, there have been many debates on Bitcoin being environmentally unfriendly since it requires substantial electric power to validate a single block. But with PoS, we don’t need lots of energy to mine blocks. In terms of energy consumption, PoS is more accessible. 

Cost of mining

To mine Bitcoins or other PoW based cryptocurrencies, one generally needs specialized hardware equipment that might cost a fortune. But in PoS, you can become a network validator with practically any computer with the internet, making it cost-efficient, and everyone can participate in the network consensus. That’s not entirely accurate – as many PoS blockchains require a certain amount of crypto units in order to stake. So you may still require capital to engage in staking, depending on the coin you pick.

Low fees

Gas fees have been one of the biggest problems in blockchains like Ethereum and sometimes make the network inaccessible for retailers. High gas fees impact operations hosted on the blockchain as they simply become a lot more expensive. But since PoS requires less energy and work, the transaction fee is fairly less than most PoW blockchains. 

As mentioned earlier, there are several myths about the PoS algorithm that needs to be addressed. But among the many misconceptions, two of them sparks the most skepticism among crypto enthusiasts over PoS. We will try to bust them for you.

Myth #1: PoW provides stronger immunity against centralization

The whole point of cryptocurrencies and the blockchain revolution is the concept of decentralization. After going through multiple crises, the world now understands the importance of decentralization better than ever before. It’s certainly been a contributor  in boosting the crypto movement “to the moon.” 

Even though the Bitcoin network is technically owned by no one and controlled by the community, the community and the power of everyone in the community is determined by the hash rate contributed. With the increasing complexity of the SHA algorithm, miners had to make mining pools to validate the transaction and earn rewards. These mining pools were later converted into registered mining companies, making Bitcoin no longer crypto-controlled by the retailers. In fact, BTC.com, a mining pool, controls over 28% of the network. Thus even big PoW coins like BTC are prone to centralization. 

PoS, on the other hand, is managed by many individuals that have staked their coins through different wallets and generally have the voting power similar to staked coins. Hence, it is important to notice that no single entity can control or have dangerous dominance over a big enough PoS blockchain under current circumstances. 

Myth#2: PoS provides less security than PoW

In the article titled “Why PoS,” Ethereum founder Vitalik Buterin explained how PoS offers more security than PoW by taking an example of a blockchain network and how much it costs to attack a network per $1 per day in block rewards. He shows that while ASICs (Application Specific Integrated Circuits i.e., hardware finetuned to mine crypto) offer more security than GPUs, a PoS model will be the most secure and make it difficult to carry out a 51% attack. If an exploit is successful, the PoW network and coins will collapse since the hacker can exploit as long as they can. But PoS has built-in slashing mechanisms that will destroy most of the hacker’s stakes. 

In conclusion, perhaps PoS really is the future of cryptocurrencies. Safe to expect many improvements in PoS networks that will solve most challenges in the crypto space. Proof of Stake thus can revolutionize the crypto space and the entire finance sector.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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