Working of Proof of Stake

The crypto world involves a lot of terms that need to be understood by many people. One important term regarding this is Proof of stake. Proof of Stake is a consensus model used by many cryptocurrencies (including Ethereum 2.0) that switches how it picks the miners or validators that confirm blocks. Instead of letting luck pick those with the largest or fastest computers, Proof of stake switches to a random selection process of those that put up a stake to validate future transactions. Many people are unaware of the clear concept of it. To understand the Proof of stake, first, you might know what Proof of work is.

What is Proof of Work?

We would take a simple example to make it understand to you people. Let’s imagine that a race will happen, and many people line up to the starting line. These participants all vary from each other in different characteristics like some are tall, some are short, some are fat, some are slim, there may be boys or girls, most likely some would be healthy, and others might be injured, or some may be young and other would be old. As soon as the race starts, everyone starts running, and whoever wins the race will get a big reward. But one thing exceptional in this race is that there is neither any trophy/reward for the runner-ups nor any participation rewards. This is how actually Proof of work works. Instead of one race, there are continually races back to back. The person who wins one race would be more likely to win a bunch of other races as he will be in the best shape among all in the conditions provided. However, with Proof of work, there is some work involved. So even the small players, the guy with bones problem or an older man with 75 years of age, does have a chance to win even if it’s a long race, he still has a chance. As one person may be affected by some external condition and the other got a chance to win.

Nevertheless, miners use computers to do the work instead of runners when it comes to Proof of work. It is called the Proof of work because they work hard to prove that some competition is true. In short, the better computer you have, the more computer you have there are more chances for you to win.

What is Proof of Stake?

Considering the same runners from the example mentioned above, we will discuss here Proof of stake. In this case, not all runners are supposed to run, rather we make one runner run, and when he completes his race, he will get rewarded. To be at the starting line, or you can say if you wanted to be picked up, you have to put up a specific amount called a Stake. This is some money you put up so that if you do something bad, e.g., if you don’t finish the race, your stake can be taken away as a punishment. This is so that you don’t do bad things.

What if they don’t complete the task?

In crypto terms, what if we select them to validate a block, but they give up. Since they signed up to be a validator and did not validate either, maybe because they didn’t want to, said up incorrectly, have an internet connection issue, or their computer switched off. We do a process that is called slashing them. Slashing is the term used when you take away some of their stake in the form of coins they initially locked up. To avoid this, you have to be a reliable validator.

How do the validators get picked?

Every Proof of stake model seems they have a few different factors that they combine to pick each validator to validate the block. Some are those that are taken into consideration by how many total coins they have staked. This idea implies the more coins you stake, the more trustworthy validator you become. Others include that how long you have been staking. The validators who have been staking for a long time are more reliable and trustable. One way includes randomness that gives everyone a fair shot to be picked up. Most models combine all of these ways, and to know them; you have to read their white papers mostly.

Duration of the task?

In Proof of work, we make a task difficult and make more and more people participate and work harder. In this way, blocks are solved moderately, i.e., neither too fast nor too slow. In contrast, in Proof of stake, the task is made so easy that a single computer or a modern smartphone can solve it quickly if we take it compared to millions of expensive miners out there mining for 10 minutes to solve a single block.

What if someone cheats?

If someone cheats or performs any fraud like giving some free coins or making fake transactions, they are fact-checked, and if the fact-checked is proven wrong, their stake is removed. This checking makes it easy for the users to fact-check the validators, and if they find any fraud, they can report the validator resulting in the loss of money of the validator.

The transition of Proof of Work and Proof of stake

Proof of work is a very successful consensus mechanism because anyone can join the network even with a small or less powerful computer. However, if the network grows, the cost to mine increases, and it likely becomes playing a luck game that they might win, but the chances are low with a less powerful network. When the network grows too large, switching from Proof of Work to Proof of stake becomes a good idea. Proof of stake can’t be made too early nor too late; rather, it is transitioned when needed. This transition is the reason Ethereum is moved from Proof of Work to Proof of Stake. Many coins are started at Proof of Work, and when they get larges up, they switch to Proof of stake.

In contrast to Proof of work, where you have to invest in hardware and electricity, Proof of stake only invests in the native coin you buy. So witching to Proof of stake should increase the price of the coin. Hence Proof of stake in every aspect is one step ahead of that of Proof of work.