Proof of Stake (PoS) is rapidly emerging as the preferred method for securing blockchain networks, offering lower energy usage, faster transactions, and opportunities to earn rewards. Users can participate in PoS by staking their tokens rather than mining, making it energy efficient and financially rewarding.
What is Proof of Stake?
Proof of Stake is a mechanism where validators are selected based on the number of tokens held rather than computing power. The more tokens a validator locks up, the higher their chances of being selected to create new blocks and confirm transactions.
In exchange for securing the network, the validator, along with any delegators (more on this in a moment), receives a payout in the form of the asset they are staking, proportionally to the amount held.
Some proof of stake networks require a minimum amount to stake, either as a delegator or validator, while others do not. For example, you need at least 8 ADA to delegate on Cardano, but there is no minimum to become a validator, whereas on Ethereum you need 32 ETH to be a validator.
How Proof of Stake Works
In this mechanism, the network is secured by participants who commit cryptocurrency to the system, with roles and processes such as validators, staking, delegators, and stake pools working together to validate transactions and maintain the blockchain.
Validators and staking
Validators secure the blockchain by staking tokens and confirming transactions. Selection is random but weighted by stake, so those with more tokens have a higher chance to validate blocks.
Delegators and stake pools
Most users delegate their tokens to a validator or stake pool operator instead of running a validator themselves. Delegators still earn rewards even though their assets remain stored securely in their crypto wallets.
Proof of Stake vs Proof of Work
The two most popular ways transactions are validated on the blockchain are proof-of-work and proof-of-stake.
Networks like Bitcoin, Ethereum (1.0), Litecoin, and Bitcoin Cash use proof of work, where miners compete to solve complex mathematical puzzles to add new blocks to the blockchain.
They need to solve it with proof. Generally, this requires specialized equipment that uses a large amount of energy. The miner who completes the puzzle first creates the next block in the chain and publishes it to the network. The other miners involved in the process turn validators and verify if the solution is correct. The miner who has successfully solved the puzzle receives rewards in tokens.
Benefits of Proof of Stake
There are numerous benefits to the proof of stake consensus model, including the following:
Energy efficiency
One of the biggest benefits of a proof of stake blockchain is the lowered environmental impact they generate compared to proof of work. It takes much less processing power to validate transactions, meaning that for something that has many transactions like NFT sales, a proof of stake blockchain is much more efficient for cost and speed.
Faster transactions and higher throughput rate
Part of the issue with Bitcoin and Ethereum is high transaction costs due to network congestion, which is tied to the throughput or network speed. Both of those networks have very low transactions per second, which means it does not take a lot for the network to become congested. This creates a situation where you have to pay a high fee to push your transaction through in a reasonable amount of time.
With proof of stake, each validator or pool becomes a node through which transactions can be processed, effectively increasing the throughput and network speed the more validators are on the network. This creates blockchains that can process thousands of transactions per second with a much lower cost.
Network speed and scalability
Part of the issue with Bitcoin and Ethereum is high transaction costs due to network congestion, which is tied to the throughput or network speed. Both of those networks have very low transactions per second, which means it does not take a lot for the network to become congested. This creates a situation where you have to pay a high fee to push your transaction through in a reasonable amount of time.
With proof of stake, each validator or pool becomes a node through which transactions can be processed, effectively increasing the throughput and network speed the more validators are on the network. This creates blockchains that can process thousands of transactions per second with a much lower cost.
Downsides of Proof of Stake
Despite its benefits, there are several downsides to using proof of stake to validate transactions.
Minimum staking requirements
Some networks require minimum stakes, which can potentially limit participation and centralize rewards.
In some cases, it is fairly negligible (such as needing 8 ADA to stake on Cardano), but in some cases it can mean a high barrier to entry for most (such as needing to stake 32 ETH to be a validator on Ethereum 2.0). There are criticisms that this could lead to a more centralized crypto environment with large companies earning most of the rewards from staking.
Lock-up periods
While not necessarily a bad thing for network security, many proof of stake blockchains have a lock-up period after you stake. This means that once you stake your assets, there is a minimum amount of time you have to wait before you can have access to them if you choose to unstake. For example, staking on Polkadot (DOT) has a 28-day lock-up once you end your delegation, while Terra (LUNA) has a 21-day period after you select your delegation.
Risk of misbehaving validators
As mentioned earlier, if you select an untrustworthy validator (bad actor), it can mean negatives for you as a delegator. Depending on the protocol, you can lose rewards or even your staked assets if the validator performs bad actions such as not being online, failing to properly validate, or some sort of collusion.
Security trade-offs
While PoS is highly secure, it’s generally considered slightly less resistant to certain attacks than PoW due to lower energy costs. However, it is still extremely financially expensive to attempt an attack on a proof of stake network, and while less secure than proof of work, it is still extremely safe.
Current Proof of Stake Cryptocurrencies
While not an exhaustive list, here are a few examples of top crypto assets that use proof of stake and their current rewards:
The minimum delegation requirement is 8 ADA, while there is no strict minimum to operate a stake pool (although having little or no stake makes it harder to attract delegators). Pool operators can charge varying fees. The current payout is generally around 4–5% per year, depending on the pool, and there is no lock-up period for delegators.
Solana is a relatively newer cryptocurrency that has gained significant market share due to its very fast transactions and low fees. Staking SOL is fairly easy and can be done directly from supported wallets or through exchanges. The minimum to delegate is very low (around 0.01 SOL). Running a validator, however, is one of the more difficult staking setups, requiring expensive hardware, strong technical expertise, and a large amount of SOL. Current staking rewards for delegators are typically around 5–7% annually.
There is no fixed minimum to delegate DOT, but delegators must be among the top nominators of a validator to receive rewards, which creates a practical barrier to entry. To become a validator, a large bonded stake and technical setup are required (often hundreds of DOT or more, depending on network conditions). There is a 28-day unbonding period when unstaking. The current payout is typically around 10–14% per year, though rewards are not guaranteed.
There is no minimum delegation amount, and rewards are paid regardless of how much other users have delegated to the same baker (validator). Becoming a baker has a relatively high barrier to entry, requiring approximately 8,000 XTZ as a bond. There is no lock-up period for delegators, while bakers have about a 14-day unbonding period. Current payouts are typically around 4–6% per year.
Terra 2.0 has no minimum delegation amount, but becoming a validator requires significant time, technical knowledge, and ongoing maintenance. Validators can charge commissions, and poor performance or malicious behavior can result in slashing, affecting both validators and delegators. There is a 21-day lock-up period for unstaking. Current payouts are generally around 5–7% per year, though the network carries higher risk than many others.
There is no minimum delegation amount, and while it is technically possible to become a validator with a small amount of ATOM, doing so competitively is highly complex and usually requires a much larger stake. Validators can charge variable fees, and both delegators and validators face a 21-day unbonding period. The current payout is typically around 8–12% per year.
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