Proof of Stake (PoS for short) refers to a process by which a blockchain network reaches a consensus on which participant is allowed to generate the next block. A weighted random selection is used, whereby the weights of each participant are determined from the duration of participation and/or assets (the “stake”). In contrast to the Proof of Work used in Bitcoin, Proof of Stake does not require time-consuming and energy-intensive mining and it is not possible to take over the network by owning computing power alone.
You receive tokens, for example stETH, as a kind of “receipt” for the “staked” money. – As with mining, staking also pays out a “reward”. A fundamental difficulty of proof-of-stake methods is the so-called nothing-at-stake problem. This states that in the case of several competing branches of a blockchain, the creators of blocks have the incentive to create blocks on all these branches, since this parallel generation does not represent a significant additional effort, unlike proof-of-work. If a large number of stakeholders act in this way, no consensus can be reached on the “correct” branch. One of the ways to counter the nothing-at-stake problem would be to sanction parallel generation.
Delegated Proof of Stake (DPoS)
A well-known further development is the consensus algorithm Delegated Proof of Stake. In this variant, the weighting in claim selection is not based on one’s own share of the network resources, but representatives are elected in a stake-weighted election by the shareholders of a blockchain, who are allowed to sign the next blocks of the chain. So the right to sign blocks is effectively delegated to these elected representatives. It is important to understand that no tokens will be sent to these elected representatives, but only a stake-weighted vote on the choice of block producers. Delegated Proof of Stake is used as a consensus algorithm by some blockchains, including EOS, Gridcoin, Steem, and Tronix.
Difference from Proof of Work
Since Proof of Stake (PoS) requires no computing power and therefore no energy to validate a block, this consensus algorithm is significantly more energy-efficient and therefore more environmentally friendly than Proof of Work (PoW). This is one of the reasons why Ethereum made a switch from a PoW to a PoS algorithm in September 2022.
Proof of Stake is more scalable than Proof of Work. After all, you need a lot of computing power for PoW. However, this means that decentralization decreases with the increase in the value of the coin, as it no longer becomes affordable for everyone. So if you have invested in the respective coin early on, you have a clear advantage here.
However, in terms of security, at least in the case of Bitcoin, PoW has the edge, as the blockchain has now become so large that you would have to spend an immense amount of computing power (51% of the total power provided so far) to manipulate the blockchain. This is very unlikely because, firstly, it would not be economically viable, and secondly, hardly anyone is able to provide such computing power. However, trying to manipulate the blockchain is not quite so easy with PoS either. To do so, you would need to own 66% of the coins in circulation, and this is also unthinkable with the more established blockchains.