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

PROOF OF STAKE (POS) THE FUTURE OF CRYPTOCURRENCY

April 29, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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In April 2021, the total market value of cryptocurrencies surged past $2trillion for the first time, which exceeded the all-time high of $830billion of 2018 during the widespread crypto boom. That is so much money getting into the cryptocurrency market, which means that users need to consider the technology's long-term feasibility.

Proof of stake is one of the valuable elements of contemporary blockchain architecture. It is efficient, cost-effective, and future-proof. As a consensus algorithm, proof of stake is a suitable solution for creating a trustless system to be used for both large-scale cryptocurrencies such as Ethereum and small-scale institutions. Its enforcement of incentives and penalties discourages fraudulent behavior both on a computing and social level.

How significant is proof of stake?

Proof of stake or PoS is a technique of validating blocks on the blockchain by having users vote for individual blocks. For a validator to be eligible for a vote, they should provide a stake, usually a currency of their choice. However, proof of stake networks demands a miner's own currency to be staked, raising the bar of entry for the validators. The system does not require high amounts of energy, unlike proof of work, making it manageable in conventional devices such as home desktops.

Like any other consensus system, proof of stake protects itself from any malicious activity like fraudulent blocks and 51% attacks. It is outstanding at this point as a contemporary mechanism. The amount required to earn the 51% staking power can be set so high that the user would not benefit from attacking the system.

Validating blocks on invalid chains is also preventable through punishments. Some proof of stake blockchains deduct or slash a certain amount or the entire staking currency of a user who tries to validate on minority voted blockchains. To better understand how PoS impacts the future of cryptocurrencies, we have to compare it to proof of work.

Proof of work

Many cryptocurrencies are built upon a system of proof of work (PoW). Blockchains based on proof of work require every authenticating computer to record all the data on the chain as a requirement of the consensus to keep them secure. 

That means miners who try to solve the cryptographic puzzles and earn coins as rewards have to invest heavily in powerful computers and electricity to secure the network and validate transactions. But as the blockchain expands, it requires more and more computing power and cycles requiring increasing amounts of energy.

How the proof of stake solves the problem

One of the world's largest cryptocurrencies in terms of market cap, Ethereum announced that it will migrate to proof of stake, and users are anticipating the big move. Currently, it is working on a software called Ethereum 2.0 (ETH2) that aims to remove proof of work entirely and focus on protecting the network from huge amounts of energy to large amounts of capital.

Unlike PoW, PoS relies on economic incentives. In this consensus, users can stake their Ethereum to become a validator and get rewarded with a block and transaction fee just as a miner would. Suppose a validator acts maliciously, then their staked coins are taken as a penalty. In that case, they are barred from being a validator in the future. That leaves only good actors on the network.

Note that the rewards for the validators are directly proportional to the amount of currency being staked. The more a user stakes, the higher the validator reward. Like free trading currencies, the focus will move from low-interest currencies to high-interest currencies until the achievement of free-market equilibrium.

Lower electricity costs

PoS does not require solving complex puzzles, which means that the cost of electricity to verify transactions is significantly lower. According to Buterin, a co-founder of Ethereum, migrating to PoS will substantially cut down the energy consumption of verifying Ethereum transactions more than a hundredfold. The considerable reduction of energy consumption is a major milestone towards adopting cryptocurrencies since 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 methods developers, startups, and existing blockchains like Zilliqa have tried to solve the sustainability problem. It refers to a form of database partitioning that divides extensive databases into small, quick, and manageable parts known as data shards.

Shards eliminate the need for every node to process the whole network's transactional load. The parts work simultaneously to maximize performance while requiring a lower amount of computational power and storage per node, making it easier for the system to scale to larger networks. 

Every node only has to maintain the data related to its shard. Through sharding, a blockchain can maintain its decentralization and security, which are the critical features for the sustainability of digital currencies.

Stumbling blocks of PoS

PoS may be the next big thing for the growth of cryptocurrencies, but there are some hurdles along the way known as thin clients and shard takeovers. These forms of attacks involve corrupting one specific shard to take advantage of the entire system. But that is not feasible in a PoW model because of the high amounts of energy required.

Another stumbling block is that whenever significant changes are made on cryptocurrencies, a hard fork is necessary. A hard fork is whereby the nodes of the new network of blockchain do not accept the older network of the blockchain. That means old coins cannot be used on the new system. Huge fluctuations often accompany such scenarios, and that has caused controversy in the past.

CONCLUDING THOUGHTS 

Many cryptocurrencies are watching Ethereum's PoS experiment with a lot of interest. Its success or failure is more likely to determine the future of the blockchain world as a whole. The positive thing is, if PoS turns out to work, it will be a better alternative that will accomplish what PoW does but with more efficiency.

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