What is the PoS Consensus Mechanism? Understand the differences between PoS and PoW at a glance

In the operation of blockchain, Consensus Mechanism is the key to maintaining network security and consistency, and the PoS Consensus Mechanism selects validators through token staking. This article will delve into the operating principles of the PoS Consensus Mechanism, revealing how this mechanism ensures the security of transactions and the stable operation of the blockchain without relying on high-energy-consuming calculations.

What is PoS?

Proof of Stake (PoS, Proof of Stake) is a Consensus Mechanism used in Blockchains, where validators are selected through staking Crypto Assets. These validators are responsible for validating transactions and creating new Blocks.

Nerdwallet, a professional financial website, points out that PoS, compared to traditional Proof of Work (PoW), does not require a large amount of energy to perform complex mathematical calculations. Instead, it relies on the number of tokens held by users for voting, making it more environmentally friendly and energy-efficient.

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How does the PoS Consensus Mechanism work?

In the PoS system, participants can stake their Cryptocurrency holdings on the network, a process known as "stake".

Stakers will become candidate Blockvalidators, and when they are selected, they will be responsible for processing new transactions and verifying their legitimacy, giving them the opportunity to receive network rewards. This mechanism not only reduces the technical threshold for participation, but also reduces reliance on high-energy-consuming hardware, making it more sustainable than the PoW system.

Source: 'Encryption City' Mapping PoS Consensus Mechanism Operation Diagram

A report from the World Economic Forum in Switzerland points out that PoS is not without risks or disadvantages. Because the selection of validators in PoS is based on the amount of Tokens held, this may result in larger Token holders having too much influence; secondly, in the stake process, if technical errors or network attacks occur, stakers may suffer losses, thereby increasing the risk of participation.

Overall, PoS provides a low-energy, lower-threshold blockchain solution, but it also faces challenges such as centralization and security risks.

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What are the differences between PoS and PoW?

PoW relies on Miners to verify transactions and generate new Blocks by solving complex mathematical problems. This process requires a significant amount of computational power and results in high energy consumption, especially in large networks like BTC.

Image source: 'encryption City' illustration PoS vs PoW differences

Compared to PoW, PoS Nodes select validators based on the amount of staked Cryptocurrency, and validators stake Tokens to participate in validation and receive rewards, significantly reducing energy demand. For example, after Ethereum transitions to PoS, energy consumption dropped by 99.95%.

《encryption City》compares the characteristics of PoW and PoS Consensus Mechanism in more detail and organizes them into the following table:

Features

Proof of Work (PoW)

Proof of Stake ( PoS )

The verification mechanism verifies transactions through Miners solving complex mathematical problems. Validators randomly selected by staking Token confirm the transactions. Energy consumption is high because it requires a large amount of computing power and low electricity. It significantly reduces the demand for computing power. The reward mechanism allows Miners to win Block rewards through Mining competitions. Validators stake Token and confirm Blocks to obtain transaction fees. Decentralization has the risk of centralization, where large Mining Pools can control a large amount of computing power. Theoretically, it is more decentralized, but users with large holdings have higher influence. Security requires controlling more than 50% of the Computing Power to launch a 51% attack. Incentives in the economy, attackers may lose stakeToken, dropping the attack motivation. The threshold for entry requires powerful computing power and hardware equipment. StakeToken can become validators with relatively low threshold.

Image source: 'encryption City' mapping PoS and PoW Consensus Mechanism comparison

It is worth noting that in terms of security, PoW relies on Computing Power to prevent attackers from controlling more than 50% of Computing Power to launch attacks; while PoS ensures economic incentives and punishment mechanisms through stakeToken, and attackers will lose their stakeToken if they manipulate maliciously.

Although PoS theoretically can promote Decentralization, large-scale coin holders may still control significant power, but how to avoid excessive centralization of power remains a challenge.

How PoS reduces 51% attack

In the PoW system, if an attacker can control more than 50% of the Computing Power, they can launch a so-called '51% attack' to manipulate Block chain records and double spend Crypto Assets.

However, in PoS, the cost of such attacks is very high. NerdWallet explains that attackers in the PoS mechanism need to hold a large amount of Tokens to control most of the stakeTokens; and once the attack fails, they will face the loss of stakeTokens, that is to say, Po significantly increases the cost of attacks through economic structure design.

In addition, PoS-based Blockchains like Ethereum are also planning to introduce Sharding technology to improve the scalability and security of the network. Sharding technology will divide the Blockchain network into several smaller parts (called 'Sharding'), each Sharding having its own validators. This approach requires attackers to simultaneously attack multiple Sharding even if they want to control the entire network, significantly increasing the difficulty and cost of attacks.

What are the main Cryptocurrencies that use the PoS Block chain mechanism?

Currently, there are several major Blockchains adopting the Proof of Stake (PoS) Consensus Mechanism, and these Cryptocurrencies choose PoS because it is relatively more energy-efficient and has the potential for Decentralization compared to Proof of Work (PoW).

Here are some major cryptocurrencies that adopt PoS:

Ethereum（Ethereum, $ETH）

Ethereum is one of the most well-known cryptocurrencies that adopts PoS. After the upgrade of 'The Merge' in 2022, Ethereum officially transitioned from PoW to PoS, significantly reducing its energy consumption.

Cardano (Cardano, $ADA)

Cardano is a research-based Blockchain platform that has been using the PoS mechanism from the beginning. Its design emphasizes scalability, security, and energy efficiency.

Polkadot (Polkadot, $DOT)

Polkadot is a Cross-Chain Interactionprotocol, designed to connect different blockchains and achieve the transfer of data and resources through Cross-Chain Interaction. It uses the PoS mechanism to verify transactions and ensure network security​.

Tezos（$XTZ）

Using the PoS mechanism to promote network governance and Consensus decision-making, allowing Tokenholder to participate in validation and receive rewards.

Algorand ($ALGO)

Algorand is a blockchain that focuses on speed and decentralization, using a pure PoS mechanism to ensure the decentralization of the network and enable validators to process transactions quickly.

Does the PoS Consensus Mechanism have any drawbacks? 3 potential risks of PoS that cannot be ignored

Although PoS Consensus has many advantages in terms of energy efficiency and Decentralization, it also has some potential drawbacks and challenges. "encryption City" summarizes 3 main disadvantages of the PoS mechanism:

Centralization Risk

The economic risk of a 51% attack

Long-term Token Lock

In the PoS system, validators are determined based on the amount of Token they hold. Users who hold more Tokens have a higher chance of becoming validators and earning more Block Rewards. This may result in a situation where the rich get richer, as participants with a large amount of Tokens gain more profits, further consolidating their influence and weakening the decentralization of the network.

The World Economic Forum of Switzerland also pointed out that although PoS is considered a mechanism to promote broader participation, in reality, many ordinary users find it difficult to independently become validators due to the economic requirements of staking, leading to the rise of professional institutions or large staking pools.

On the other hand, although PoS can effectively reduce the possibility of a 51% attack through the economic punishment mechanism of stakeToken, if the attacker has enough capital to control more than 50% of the stakeToken, they can still manipulate the network. Although the cost of such attacks is extremely high, it is still possible in the case of uneven Token distribution.

Finally, the Tokens in the PoS system will be locked during the staking period and cannot be freely transferred or used. If there is a significant change in the network or price Fluctuation, validators may not be able to sell or transfer their assets in a timely manner, increasing the participants' risk and thus affecting the flexibility of investors.