Proof-of-stake consensus mechanisms have become essential in the DeFi space. Investors can now earn from their favorite coins, potentially never having to sell to make great ROI.
Compared to traditional finance, it might sound too good to be true. It might seem unsustainable, centralized, and inflationary. Yet, PoS seem to be the direction that the crypto industry is heading.
How does that work?
Cryptocurrencies use decentralized, distributed blockchains. Thousands of node devices keep copies of this financial database. As people make transactions, these devices create their own blockchains based on the original.
Some blocks might be common (AKA confirmations), others might be unique. Assuming they’re all valid, how do you know which chain to upload to the actual blockchain?
There are no “correct” answers in crypto, only consensus mechanisms. In Bitcoin, whatever validator verifies the transaction first will be the “right” block. In proof-of-stake, the validator with the most coins will have the highest chance of being chosen.
Every time you trade a PoS cryptocurrency, there’s a random algorithm running. Validators can influence their probability by putting more tokens at stake.
Consensus mechanisms inspire by factors like processing power, token quantity, holding history length, memory capacity, and activity. There’s no universal agreement as to what criteria are best. The most popular ones are:
Alternative consensus algorithms include:
For users, staking might be as simple as a “Stake” button on a Defi platform. But how does it work behind the scenes? Suppose you send Ethereum using a PoS blockchain:
Even though PoS has existed since 2012, it didn’t become mainstream until 2020. To understand what makes it so different, let’s compare it with the first-ever consensus model: Proof of Work.
Have you noticed? Very few proof-of-work tokens rank in the Top 20 of CoinMarketCap. These are mostly old coins launched before 2014.
Not only PoS is more popular, but some PoW coins like Ethereum have switched to this consensus method. Is it really that big of a difference? Let’s see:
Now, it’s not enough to only compare proof-of-stake vs proof-of-work. PoS has as many cons as pros, and every project manages them differently. It doesn’t mean that every PoS cryptocurrency will outperform Bitcoin.
It seems proof-of-stake has become the standard for modern blockchains. Most major coins use some variation of PoS. Polkadot, Tezos, Cardano, Tron, Cosmos, EOS, Avalanche.
That doesn’t mean it’s the perfect consensus mechanism. For non-PoS, it might seem like the only viable option. But its features don’t come without trade-offs.
The Proof of Stake advantages are:
The Proof of Stake disadvantages are:
Despite limitations, it seems proof-of-stake is the best solution so far. Not only it outperforms PoW but also encourages community building. Besides staking, users are more likely to contribute with their ideas to improve the blockchain.
PoW is about competition, PoS is about teamwork. The question is, what proof-of-stake blockchain is the best?
If you believe Pulsechain could be “the one,” stake PLS, PLSX, and LOAN tokens with our Liquid Loans validator.
Here are more specific Q&As about proof-of-stake and consensus methods.
Not only is Bitcoin proof of work, but it’s the largest PoW blockchain today. Which also makes it the most expensive for crypto mining and network attacks. Bitcoin’s algorithm makes PoW more intensive as validators mine more blocks.
Bitcoin has over 15,000 nodes and consumes ~0.55% of the global electricity production. While Bitcoin could become proof-of-stake, it’s unlikely. Validators won’t give up their mining profits, which come from a handful of pools controlling most of the block rewards.
The current ETH blockchain (Ethereum 2.0.) has been proof-of-stake since late 2020. The network has become more scalable, cheaper, and faster. So have all other apps backed by ERC-20 tokens, which now allow staking.
ETH supported both PoW and PoS until merging into a single PoS chain in 2021. Note that proof-of-work still exists on earlier Ethereum forks such as Ethereum Classic and Expanse.
Before 2.0., Ethereum gas fees were increasing, averaging $100 to $200 last year. So far, fees have been below $60 for at least six months (besides occasional spikes). So while ETH 2.0. has reduced fees, they’re nowhere near as competitive as <1$ on Binance, Solana, or Avalanche.
Pulsechain is the proof-of-stake Ethereum fork that will hopefully close the performance gap. Ethereum has more dApps than all other networks combined, and it’s because of this market size that many developers stay in it.
Now, Pulsechain allows them to copy all ERC-20 tokens to a faster and cheaper network. This benefits smaller traders, developers, and even Ethereum (because of load sharing).
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Max is a European based crypto specialist, marketer, and all-around writer. He brings an original and practical approach for timeless blockchain knowledge such as: in-depth guides on crypto 101, blockchain analysis, dApp reviews, and DeFi risk management. Max also wrote for news outlets, saas entrepreneurs, crypto exchanges, fintech B2B agencies, Metaverse game studios, trading coaches, and Web3 leaders like Enjin.