Proof of Stake (PoS) is no longer a “new” concept, yet I find that people most often confuse the reason why we had it in the first place, and what are some very important advantages of PoS, especially for global adoption of blockchain.
Thus, in this writing we will take a closer look at the PoS consensus model and its most fundamental component: validators. Starting with the core reason why we had PoS in the first place, we will discover how validators changed with the evolution of this new consensus model and the importance of this change for blockchains.
Why did we leave Proof of Work?
You can read a lot of arguments on why to use PoS over PoW, such as that it has huge energy consumption or that the computation power is not a very decentralized source of truth. Although these arguments have some truth in them, this is not the biggest advantage of PoS over PoW.
PoW networks are slow: Take Bitcoin for example; a few minutes per block is not very efficient already, but the real problem is the concept of finality. Before you can be sure that your Bitcoin block is finalized, you need to at least wait a few blocks, so in practice sending BTC to someone takes around an hour. This is exactly the time before Binance accepts your Bitcoin deposit, precisely because they cannot be sure that the money has arrived before this time passes.
A natural argument is to make these networks faster, for instance by making their block times shorter. For instance, if a Bitcoin block was 12 seconds long, like in Ethereum, then a BTC transfer would take around a minute. Not super fast, but much better than the previous.
The problem is that the shorter a Bitcoin block becomes, the more blocks you need to actually wait before you can make sure there will not be a fork. So if a Bitcoin block was 12 secs, then we would wait for a much higher number of blocks to avoid a fork, resulting in the same finality time in terms of hours.
This is not a design issue, but an inherent feature of PoW networks: As the source of finality is outside the network, i.e., we do not know how much computation power is available, we need to give the world some time so that it can communicate this knowledge to us.
How does Proof of Stake solve this problem?
In Proof of Stake, finality and leader election are done through stake, i.e., amount of coins locked in the network. This amount is always known by the network, so it is an intrinsic property. Thus, the network does not need to wait for knowledge to arrive, and we can even achieve single-block finality and subsecond block time.
Of course, PoS models have very different security assumptions, and some people argue that this faster speed comes with the cost of a less secure network than PoW. This is not a security paper, so I will not argue this here. For now, let us just focus on what PoS networks need to properly work.
First of all, we need the tokens on the network, that are controlling the consensus, to be locked. This is the reason why we can avoid forks, since locked tokens can be burned if there is a problem on the network, i.e., slashing. Interestingly, not all PoS models have slashing, but in one way or another they all require this idea of “unusable tokens” that are locked to secure the network.
This makes PoS networks require an incentivization to lock these tokens.
Stake rewards and APY
Finally, we have come to the financial importance of PoS models, which is the staking rewards. By defining an APY (annual percentage yield), which is what staked tokens earn periodically, the network rewards participants who stake their tokens and participate in the security of the network. Moreover, this APY is usually calculated dynamically: If there are a lot of stakers, APY decreases so that some of them are motivated to liquidate their assets, while if staking ratio is low, APY is increased to incentivize locking coins.
The emphasis here is that APY is not a security mechanism, but an incentivization over what PoS networks require to be secure. If people had other motivations to stake than financial, like a social reputation system for instance, then APY would not be a requirement, as people would still stake without gaining any tokens.
Nevertheless, rewards are the most common (or only?) way of incentivization in PoS networks today. And this mechanism has a huge effect on the nodes that are running the blockchain.
Validators and their responsibilities
Validators are the parties that token holders lock their tokens into, i.e. stake, to receive rewards. It is costly and very hard for regular people to run their own nodes, so they trust validators to operate a node for them, while they lock their tokens in this validator on the network. Validators are incentivized by a small portion of the earnings of the staker, named as the commission. Note that this model is not true for all PoS chains, but a wide-enough generalization.
Up until here, we have seen that PoS was a solution to the performance problems of PoW, without any financial advantages over it. This new role of validators, that are defined thanks to APY, changes this, and PoS suddenly becomes a much stronger model than PoW in terms of adoption.
With PoW, all miners need to do is to mine. They can be anonymous, or even hated by the world if they like, but as long as they mine, they are a part of the network. This is not the same with PoS. Validators are staked by people, and their look on people’s eyes, like their contributions or their performance, matters.
This is actually a delegated voting model, where each individual delegates their power to secure the network to a validator. If the validator wants this delegation to last, it must actually prove that it is doing a good job, much like governments in democracies: A government can make sure it will be reelected by only keeping the voters happy.
Why is this an advantage of PoS over PoW?
The observation was simple: If you give people the right to choose, then the chosen entities, that is validators, have the financial incentive to work for the best interests of people.
This is the reason why PoS can be adopted in the world much faster than PoW. PoS validators have the motivation to work for their network, contribute to the ecosystem. As a validator, we at node101 have been working for the community in many ways in the networks we delegate, such as developing products, organizing events, or educating people. The reason behind these actions was not moral, but purely financial. If we want our delegators to support us, then we need to make sure that we give the best possible service to them and the network.
On the other hand, this may also be taken as a disadvantage, totally based on your perspective. Public, regulated validators are not like free, unaudited miners. Personally, I find that the only way blockchain will be adopted is through becoming public and recognised in the law, and I find the anonymity of Bitcoin miners as a huge obstacle to Bitcoin becoming a financial payments system instead of digital gold.
Of course, just because many PoS validators are public and chosen, this does not mean PoS is ultimately better than PoW. There are still a lot of problems to be solved, and a lot of steps to take.
Conclusion
If you are a validator, probably you already knew about all these here, and not much to change. But if you were just a regular crypto user, then you should take a lesson here.
With all the tokens you have and you stake, you have power over the network. Of course, you do not need to use this power, and you can just continue with the default validator that your exchange is offering you. Yet, I believe it is nice to know you have an option to choose for something better.