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Understanding Proof Of Stake


For anyone who has followed Ethereum closely, it is well known that the community has been pushing to move to Proof-of-Stake for quite some time.


What Exactly is Proof-of-Stake?

Proof-of-Stake is a consensus mechanism in which a blockchain network comes to an agreement on the order and validity of transactions. It is similar to Proof-of-Work in Bitcoin, in which miners perform expensive computations to signal their honesty to the network. Proof-of-Stake can be thought more of as a sybil resistance mechanism, it ensures that those producing blocks act in the best interest of the network.

In Proof-of-Stake, block producers are chosen in a deterministic way, depending on how much ETH they own, also referred to as their stake. Once a user has chosen to be a block producer and put their coins at stake, they are entered into a validator pool from which users will be chosen at random to produce blocks. Block producers are referred to as ‘forgers’ because they are in a sense forging for blocks.

If a user is chosen, they would validate transactions similar to how miners do in Proof-of-Stake. They are incentivized to only produce accurate transactions because they can lose their entire stake if they are caught acting maliciously. Malicious forgers also lose their right to participate in the Proof-of-Stake system entirely. Similarly, forgers who produce accurate blocks ean fees for their service, furthering incentivizing them to act honestly.


Ethereum Migration

Ethereum has long wanted to switch to Proof-of-Stake. The community considers a much more environmentally friendly alternative to Proof-of-Work and an urgent improvement that will make Ethereum much more efficient. Once all of the code has been well-tested, Proof-of-Stake will be integrated via a community supported hard fork.

A lot of the support for Proof-of-Stake stems from the impact that Proof-of-Work has had on the environment. Every Bitcoin transaction requires the same amount of electricity as powering 1.57 american households for one day. Similarly, it is estimated that Bitcoin transactions may consume as much electricity as Denmark by 2020.

Ethereum developers see Proof-of-Stake as a means to achieving the same level of decentralization, but without the environmental windfall. Forgers in Proof-of-Stake don’t require any outside electricity to support their behaviors.  

Design Tradeoffs

The core decision when deciding on a consensus mechanism is always ‘how much security is necessary to ensure a specific level of decentralization?’

Ethereum and Bitcoin both relentlessly focus on decentralization, but this comes at a cost to scalability. Users don’t want to wait 10 minutes for every transaction to confirm and having every node in the network process every transaction is expensive. For a use case like digital gold, ensuring decentralization is protected at all costs make sense. For Ethereum’s goals of becoming a complex world computer, it will likely have to give up complete decentralization for a newer approach.

Today, one of the most hotly contested debates is whether or not Proof-of-Stake systems are easier to attack. Both sides present valid arguments and it’s one of those questions that will never be settled until it is tested in the wild. While Proof-of-Stake may have more attack vectors, it becomes extremely expensive to attack since owning 51% of all ETH is very difficult. Forgers also stand to benefit very little from behaving honestly, but stand to lose almost everything by acting maliciously. The agreed upon assumption is that the incentives baked into Proof-of-Stake are strong enough to deter any forgers from acting dishonestly.

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