Everyone knows that mining cryptocurrency eats up a tremendous amount of computational power and electrical energy. After all, mining operations are full of high-powered machines buzzing away as they try to hash a candidate block into a confirmed block- a new block on the blockchain — and earn the miner a small but not insignificant share of crypto in the process.
That’s just the way things are, right?
Well, not necessarily. As the world’s second most important blockchain — Ethereum — begins to make the shift from Proof of Work (the standard described above for blockchain consensus mechanisms) to Proof of Stake, things may be a-changing.
Let’s dive in and take a look at what Proof of Stake is and why it’s important to the future of cryptocurrency and Carnomaly’s development.
The Role of a Consensus Mechanism
Before we dig into what Proof of Stake is and why it’s important, it’s vital to understand the role a consensus algorithm — also called a consensus mechanism — plays in adding new blocks to a blockchain.
In traditional, centralized systems like banks, for instance, a single authority controls the system. That authority can make changes however they see fit and determine how things are done without reaching a consensus among thousands of stakeholders.
Not so in a decentralized system. The very nature of a decentralized system is that everyone controls it. There is no single man behind the curtain pulling strings and pushing buttons.
So with so many strangers participating in the blockchain, how are decisions made? After all, we’re talking about decisions like confirming whether Joe actually paid Jane that 1 BTC back in 2018. These decisions have profound implications.
Implications in the millions of dollars in the case of the single bitcoin that Jane supposedly received from Joe.
Enter the consensus mechanism. While consensus mechanisms come in various forms, as we’ll discuss shortly, they all require three key things to make them work.
Participants that wish to add blocks to the blockchain (think of them as transactional entries in a digital ledger) need to provide a stake. A stake is simply something of value that the validator must contribute. Something that they can lose if they cheat the system.
Of course, if someone is willing to give up something of value, there had better be a good reason for it. In most cases, participants usually receive a slice of the crypto pie made up of fees paid by other users or, in some cases, newly created coins. They provide the service of validating new data to be added to the blockchain in exchange for cryptocurrency. If they cheat, they lose this reward and the ability to mine new blocks.
Finally, for a consensus mechanism to work, we need transparency, or the ability to know whether a participant is cheating. With consensus algorithms, it’s inherently costly for someone to produce blocks but cheap to validate them. This ensures that regular users can keep validators in line.
What is Proof of Stake? How Does it Differ from Proof of Work?
Proof of Stake (PoS) is a consensus algorithm that was first brought up back in 2011 as a potential solution for the problems that plagued the leading consensus mechanism called Proof of Work (PoW).
Unlike Proof of Work, PoS requires no specialized equipment and no significant expenditure of energy. The concept of miners also doesn’t exist. Instead, new blocks are said to be forged rather than mined.
So if no one has to run expensive equipment and consume large amounts of electricity in the process, what is that thing of value that validators have to contribute to ensure that they stay honest? What is their “stake?”
With PoS, the proverbial skin in the game is cryptocurrency itself.
PoS alidators lock up some of their funds in the network that can’t be accessed or moved while they’re staking. Depending on the protocol, there may be a minimum amount required to be eligible for staking.
With Ethereum’s PoS, users will need to stake 32 ETH to become a validator, though staking will also be available for less through platforms like Coinbase. This stake is used to incentivize good behavior and discourage irresponsible participation.
How the Validation Process Works with Ethereum's PoS
The process of selecting nodes to forge and validate new blocks differs among protocols and can include factors like randomized selection, the node’s wealth, and staking age. Most protocols, however, employ a pseudo-randomized selection process that ensures that the decentralized network doesn’t inadvertently become centralized by relying only on the wealthiest nodes.
On the Ethereum blockchain, which is transitioning from PoW to PoS this year, nodes are chosen at random to either create blocks or validate proposed blocks.
The process of validating a proposed block is called attestation. Attesting to a proposed block simply means giving it a once-over and a thumbs up if everything is as it should be.
With Ethereum’s PoS mechanism, validators receive rewards for both forging new blocks or attesting to proposed blocks. A validator can lose their stake either in part or in its entirety by doing things like attesting to malicious blocks, going offline and failing to validate, or deliberate collusion.
When Will PoS be Introduced to the Ethereum Network?
This shift in the fundamental architecture of the Ethereum blockchain is collectively known as the ETH2.0 upgrade. As we discuss in this blog post, it was designed to improve the scalability, efficiency, and speed of the Ethereum Network. Although the process has started, it’s unclear exactly when the shift will be complete.
The Beacon Chain, launched in December of 2020 as Phase 0 of the 3-phase Eth2.0 rollout (because developers just love to count from zero, of course), is the mechanism by which Proof of Stake will be introduced to Ethereum.
Essentially, it’s the chain that will serve as the precursor to the 64 additional planned blockchains called “shard chains” that will increase the network’s capacity and improve transaction speed. These shard chains are planned for phase 1 of the rollout
Shard chains require staking to ensure that they are secure, and it’s the Beacon Chain that will facilitate the staking process. The Beacon Chain will also be responsible for the randomized selection of stakers to validate shard chains, making it more difficult for them to collude and take over a shard chain.
Phase 2, the final phase of the 3 phase rollout, will see the old and the new merging. PoW will become the legacy consensus mechanism, and PoS will officially move ETH into the era of ETH2.
While no one knows exactly when all phases will be complete, many expect Phase 1 to occur in 2021, with fully formed shards expected post-2021.
Is Proof of Stake the Future?
While concerns still exist about the practicality of proof-of-stake, Ethereum’s planned shift has pushed it to the top of the crypto headlines in recent months.
There’s no denying that Proof of Stake making the creation of 64 shard chains that will exponentially increase the capacity and transaction speed of the Ethereum network is a big deal.
Likewise, solving the problem of PoW’s not-so-environmentally-friendly mining process has profound implications on the environmental cost of achieving consensus.
A quick look at the energy consumption of Bitcoin mining, for example, paints a clear picture.
Regardless of where you stand on the importance of Proof of Stake versus Proof of Work, Ethereum’s planned adoption of PoS is a historic moment for the cryptocurrency world — one our Carnomaly team is following closely.
Its success at such a large scale would undoubtedly serve as proof-of-concept for this less battle-tested consensus mechanism and significantly impact our development architecture moving forward.