2020: The Year of Proof of Stake

With two greatly anticipated Proof of Stake (PoS) network (re)launches scheduled for 2020, I’m fairly confident this’ll be the year PoS blockchains finally break out. Ethereum (ETH), the world’s second-largest blockchain platform by market cap, has been looking to shift to PoS since 2014. Ethereum co-founder Vitalik Buterin feels that proof of stake is the key to Ethereum reaching maturity. And he’s not wrong.

Cardano, the 12th largest cryptocurrency by market capitalization as of this writing, is considering upgrading its pre-existing PoS platform as a public network, rather than launching a new system. The new public network is expected to have 100x more people running its software than any Proof of Work (PoW) system.

Supporters of PoS claim that it is much more sustainable, scalable and secure than traditional PoW systems. However, the reality is that its strengths over the traditional system are still being debated. A broad consensus has not been reached on whether the governance of such systems can be made to work. Here are my thoughts:

What is Proof of Stake and what makes it so special?

For the uninitiated — let’s take a moment to understand the proof of work system we’ve largely relied on so far. PoW is the traditional cryptocurrency mining process, in which a miner must solve complex mathematical puzzles to create new currency units. Once several such calculations are performed, the transactions are bundled together and stored on a new “block” and stored on a distributed ledger. The first miner to solve any particular problem announces it on the network and gets newly created cryptocurrency as a reward. This gets increasingly challenging as more coins are mined, thus requiring tremendous computational power and hence a large amount of electricity and hardware. In 2015, It was estimated that one bitcoin transaction required the same amount of electricity needed to power 1.57 American households in a day.

As you may have guessed, this large power requirement does make the process unsustainable in the long term. Additionally, it often applies downward pressure on the price of the cryptocurrency, since miners would want to sell their awarded coins to recover costs.

The Proof of Stake system uses a different consensus mechanism:

• To validate transactions and create new blocks, users must first show ownership of a certain number of cryptocurrency units. This way, rather than utilizing high computational power to answer puzzles, a PoS miner or “forger” can only mine transactions proportional to their ownership.
• Since forgers put their own money at stake to validate a transaction, they are incentivized to avoid fraud. They would lose their holdings if they validate a fraudulent transaction.

Source: Blockgeeks

While proof of work, in theory, is supposed to disincentivize people from committing fraud through the sheer complexity of its operations, proof of stake attempts this by asking users to put their own holdings at stake. The result? A system that utilizes much less energy and is thus considered greener and more sustainable.

Also, the PoW system is susceptible to attacks whose bogey has been raised often in cryptocurrency communities — such as the 51% attack, where a miner controls a majority of the computational power and can create fraudulent blocks for themselves while invalidating others’ transactions. With PoS, a miner would first have to own 51% of the cryptocurrency to carry out such an attack. The attack will then be disadvantageous to the miner because they have a 51% stake in the network.

In Conclusion

With PoS’es primary advantages of environment-friendliness and efficiency, I’m fairly excited about what’s to come. It’s also more democratic — since users are incentivized to get involved in such networks owing to its lower complexity and increased affordability to participate. All my crypto enthusiast friends would certainly support greater decentralization, I’m sure.

This accessibility does remove the economic and technological disincentives of proof of work, perhaps making a proof of stake network cheaper to attack. Hence, the network design for a PoS system must be as secure as possible. While we’ll continue to debate these for some time, this is unlikely to prevent two Ethereum and Cardano from shifting their networks to PoS in the first quarter of 2020. I look forward to the exciting times we’re all about to experience!