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IS PROOF OF STAKE (POS) THE FUTURE OF CRYPTOCURRENCY?

What is the PROOF OF STAKE (POS)

October 10, 2021 | 

860 Views | 

Jesus Guzman | 

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Proof of Stake is one of the valuable elements of modern blockchain architecture. It is efficient, cost-effective. And future-proof. As a consensus algorithm, Proof of Stake is a suitable solution to create a trustless system that can be used for both large cryptocurrencies like Ethereum and small institutions. Enforcing incentives and penalties discourages fraudulent behaviour, both at the level of computing and society.

n April 2021, the total market value of cryptocurrencies surpassed $2 trillion for the first time, surpassing the all-time high of $830 billion reached in 2018 during the widespread crypto boom. Meaning that a lot of money is flowing into the cryptocurrency market that users need to consider the long-term viability of the technology.

How important is Proof of Stake?

Proof of Stake or PoS is a technique for validating blocks on the blockchain, where users vote for individual blocks. For a validator to receive a vote, they must place a stake, usually a currency of their choice. Proof-of-stake networks, on the other hand, require the use of a miner's own currency, which raises the barrier to entry for validators. Unlike proof-of-work, the system does not require large amounts of power, so it can be used on conventional devices. Such as home computers.
 
Like any other consensus system, Proof of Stake also protects itself from malicious activities. Such as fraudulent blocks and 51% attacks. At this point, it is an excellent, timely mechanism. The amount required to obtain the 51% stake can be set high enough to prevent the user from benefiting from an attack on the system.

Validation of blocks on invalid chains can also be prevented by penalties. Some proof-of-stake blockchains deduct a certain amount or the entire staking currency of a user who attempts to validate blocks on blockchains selected by a minority. To better understand how PoS affects the future of cryptocurrencies, we need to compare it to Proof of Work.

What is Proof of Work?

Proof of Work is the best known and oldest consensual protocol involving parties to a network carrying out a computationally expensive job successfully to access the network's resources. 

Many cryptocurrencies are based on a Proof of Work (PoW) system. Blockchains based on Proof of Work require each authenticating computer to record all data in the chain as a requirement for consensus to keep it secure.

This means that miners aiming to solve cryptographic puzzles and earn coins as rewards have to invest heavily in powerful computers and energy to secure the network and validate transactions. But the bigger the blockchain gets, the more computing power. And cycles are needed, and the more energy is consumed.

How proof of stake solves the problem

Unlike PoW, PoS focuses on economic incentives. In this consensus, users can stake their Ethereum to become a validator and are rewarded with a block and transaction fee, just like a miner. Assuming a validator acts maliciously, their staked coins are confiscated as a penalty. In this case, they cannot act as a validator in the future. This leaves only good players in the network.

Ethereum, one of the world's largest cryptocurrencies in terms of market capitalisation, has announced that it will switch to Proof of Stake, and users are eagerly awaiting this big move. Work is currently underway on software called Ethereum 2.0 (ETH2), which will do away with Proof of Work altogether and focus on protecting the network from large amounts of energy and capital.

Note that the rewards for validators are directly proportional to the amount of currency wagered. The more a user stakes, the higher the reward for the validator. As with the free trade of currencies, the focus will shift from low interest currencies to high interest currencies until equilibrium is reached in the free market.

Lower energy costs

PoS does not require solving complex puzzles, which means the energy costs of verifying transactions are much lower. According to Buterin, a co-founder of Ethereum, the switch to PoS will reduce the energy consumption for verifying Ethereum transactions by more than a hundred times. The significant reduction in energy consumption is an important milestone for the adoption of cryptocurrencies. As it addresses the long-term problem of sustainability.

Sharding
The new ETH2 is expected to benefit from a process known as sharding. It is one of the ways developers, startups and existing blockchains like Zilliqa have sought to solve the sustainability problem. It is a form of database partitioning that splits large databases into small, fast and manageable pieces called data shards.

The shards eliminate the need for each node to process the transaction load of the entire network. The parts work simultaneously to maximise performance. While requiring less processing power and storage per node, making the system easier to scale to larger networks.

Each node only needs to manage the data that belongs to its shard. Sharding allows a blockchain to maintain its decentralisation and security, which are crucial for the sustainability of digital currencies.

PoS stumbling blocks

PoS could be the next big thing for cryptocurrency growth, but there are some hurdles along the way known as thin clients and shard takeovers. These forms of attacks involve corrupting a specific shard to exploit the entire system. However, this is not possible in a PoW model due to the high energy requirements.

Another stumbling block is that whenever significant changes are made to cryptocurrencies, a hard fork is necessary. A hard fork means the nodes of the new network of the blockchain no longer accept the older network of the blockchain. This means that old coins cannot be used on the new system. These scenarios often come accompanied by huge fluctuations. Which has led to controversy in the past.

Final Thoughts

Many cryptocurrencies are watching Ethereum's PoS experiment with great interest. Its success or failure will rather determine the future of the entire blockchain world. On the positive side, if PoS works, it will be a better alternative that achieves the same as PoW but with more efficiency.

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