1.- Principles of Proof of Stake
This article assumes the reader knows the basics of Bitcoin mining (proof of work — PoW). Here’s a refresher just in case.
The process to mine blocks (or better said, transaction validation) at proof of stake (PoS) remains roughly the same as proof of work, but it is the method of reaching the end goal that is entirely different. In PoW, the miners solve cryptographically hard puzzles by using their computational resources.
The validators in PoS mechanisms lock up tokens as a stake in the ecosystem. After that, the validators bet on the blocks that will most likely be added next to the chain. When the block gets added, the validators get a block reward in proportion to their stake (not exactly as stated but I believe this works well for a basic explanation).
The main reason validators are assumed to not be corrupted is that they have skin in the game (as opposed to the high costs of Bitcoin PoW miners) and it is detrimental for them to go against the network as they could get slashed. The two key misbehaviours that incur slashing are downtime and double signing and while the specifics of slashing are defined within each protocol, the mechanism is similar: a predefined percentage of a validator’s tokens are lost.
One of the main reasons blockchains are opting for PoS is the energy consumption of mining PoW blockchains such as Bitcoin’s. For more info on energy consumption, please check out the index at this website (estimation is that Bitcoin’s carbon footprint is comparable to the one of New Zealand).
2.- Main Disadvantages of Proof of Stake
A big potential disadvantage of PoS blockchains is that whales could get a big influence over the network, especially at the inceptions of these.
For instance, in a network that has not started as a PoW blockchain, a rich person or institution could theoretically purchase a high percentage of the tokens, more even when we take into consideration that a majority of the projects start from private pre-sales.
Without very strong tokenomics or a change on how whales may influence the governance of a PoS blockchain, we could be at risk of centralisation, even more taking into consideration that institutions with far more capital than the average crypto investor are entering the ecosystem.
Another flaw on this consensus mechanism is that on mature networks, the poor people could face strong barriers to running their own nodes as a minimum capital is usually required, leaving as an only option to join a staking pool that does not always offer decentralised governance, hence further centralising the power of the major players at PoS blockchains.
Would love to read your thoughts on potential solutions to the perceived disadvantages of PoS, please do share them!
