Proof of Stake is a protocol that allows miners to earn crypto rewards in return for staking their coins. If investors deposit a certain amount, they receive the right to become a transaction validator. Once validators start approving transactions, they’re eligible to receive coins.
2020 was possibly the year of Proof-of-Stake. The Ethereum 2.0 upgrade promises to switch from Proof of Work to Proof of Stake in the near future, promoting higher awareness of POS in the broader crypto community.
Recently, Elon Musk announced the suspension of Bitcoin Tesla purchases. The reason was the increasing use of energy necessary for Bitcoin mining. Many crypto adopters took the news seriously and turned from BTC to more ecological alternatives. As it happens, Proof-of-Stake is exactly one of those.
Difference between POS and POW
Both Proof-of-Work and Proof-of-Stake are consensus mechanisms — protocols used to reach an agreement on a single state of the network among distributed nodes. Thanks to the consensus mechanism, the decentralized community can agree on the validity of the transactions.
When Satoshi Nakamoto published his paper about Bitcoin, the first cryptocurrency, he designed a way for a transaction to get approved by multiple users. Thus, the network doesn’t need a trusted third party. To do that, he created a consensus system (a set of rules that allows all participants to agree on the validity of a transaction) and called it Proof of Work.
With Proof-of-Work, participants perform work of cryptographic computations to prove their honesty. Cryptography uses mathematical equations that are exceptionally difficult to solve (impossible for humans, doable for devices with high computational power) — but easy to verify.
How does the Proof-of-Work work?
Cryptocurrencies use blockchain, a distributed ledger technology, to record transaction data. Each block contains information on the transaction — hash of a sender, receiver, amount, date. To verify a transaction, a network needs to create a new block. If someone tampers with that process, they can rig the system and replace transactions to receive the coins sent to someone else.
To make sure that only genuine transactions get added to the block, each block is assigned a hash — a string which can be thought of as a fingerprint, created with the SHA-256 algorithm.
To verify a transaction, a miner is required to create a block by proposing a specific hash acting as a proof. The difficulty of the task is determined by the length of the sequence. This is why a cryptocurrency hash starts with a long number of zeros — to increase the difficulty of the proof.
- Proof-of-Work is an adaptive process. The more popular a given blockchain becomes, the more miners compete for the right to complete PoW, which in turn increases mining difficulty. To combat that, users join mining pools — large mining groups that divide rewards between all participants.
- PoW is based on the majority rule. If 51% of chosen miners are to approve the transaction, it’s considered valid and added to the chain as part of a new block.
- Proof-of-Work makes the blockchain ledger immutable. To maliciously alter the chain, a user would have to possess more than 50% of all mining power, the scenario which would allow them to perform 51% attack. However, the incentives for rigging the game are much lower than for genuine participation — if someone has this much computing power, they’d be better off mining. Having such a high computing power would lead to large rewards — hence, no motivation to cheat.
- Winning the PoW round is guessing the hash with the right amount of leading zeros. A winning hash might look something like this 000000000000000004dd34269e09495035943efd583b5273b1bd75e8d78ff2e8d
Proof of Stake
Since the entire point of Proof-of-Work is to require computing power, it’s an energy intensive protocol by design. To give networks eco-friendly alternatives, blockchain developers developed other consensus algorithms — with Proof of Stake leading the way.
PoS was created in 2012 by Sunny King and Scott Nadal. The first cryptocurrency that used PoS was Peercoin. Now, PoS is used by hundreds of coins — the list will soon include Ether, the world’s second most adopted cryptocurrency, native to the Ethereum network.
How Does Proof of Stake work?
The PoS relies on the network of nodes that approve the transaction. As a reward, the node owner receives the native currency of the system. The process is somewhat random, although most networks assign a higher selection probability to users with higher stakes (more crypto staked equals higher success rate). In some systems, validators can delegate their voting rights — this is known as delegated proof of stake.
PoS uses different terminology than PoW — blocks are not mined but forged. Cryptocurrencies that use PoS typically start off with PoW to create an early coin pool. Communities launch staking programs where users can deposit cryptocurrency and receive staking permissions in return. When the network executes transactions, validators attest to the validity of these operations.
The PoS nodes come in different shapes. Often, they are available as software. Users can install a validating node on the PC and connect it to the hardware wallet. There’s one condition — the node must always be online. If users disconnect, they lose their income for some time or potentially face other penalties.
Not all users are comfortable configuring nodes themselves, so some companies ship hardware nodes that come with pre-install settings. It’s an easier approach to staking, however, if a ready-to-use node malfunctions, a user has no idea how to fix the issue. Thus, investors have to rely on the official team to address the problem.
Both consensus protocols require network participants to invest assets into the network: in the case of PoW, it’s energy; for PoS, it’s temporarily locked cryptocurrency.
- Both systems have advantages and drawbacks. PoW is highly decentralized and secure whereas PoS is energy-efficient and accessible.
- In PoW, miners get block rewards and transaction fees combined. In PoS, validators only receive fees from transactions conducted on the network.
- The PoW requires miners to solve a computational problem - the main selection criterion is the amount of computing power. PoS probabilistically chooses a node on the network with possible selection criteria including staking amount, node age, trust, etc
- PoW was the first blockchain consensus system to be created, and PoS emerged as its alternative. The biggest live representative of PoW is Bitcoin. PoS is used by Cardano, Tezos, and Ethereum 2.0.
List of Proof of Stake coins
Staking is an energy-saving alternative to proof-of-work, as well as a way for crypto investors to create a constant passive income. The entry barrier of the Proof-of-Stake is much lower than for mining: in most systems, you need to stake a required minimum crypto amount and install a node.
However, to succeed in PoS, you need to choose the right project to invest in. Ideally, it should be a growing cryptocurrency with positive market trends and a small community of validators. Being among early adopters will lead to you getting more currency in a shorter time since there’s less competition.
So, in this list, we collected the most promising PoS projects, from the popular ones (ETH 2.0) to lesser-known currencies (where you can become an early validator).
Tachyon is a decentralized protocol that uses a supernode proof-of-stake. Supernodes are units with superior hardware characteristics — the network relies on fewer validators with higher processing power. There’s a significant entry barrier to the network, but the Tachyon offers a steady income flow due to the lack of competition.https://www.youtube.com/watch?v=nbbqW_EVOww
What is the protocol used for?
Tachyon uses blockchain protocols to launch decentralized applications. In 2020, they rolled out a decentralized mobile VPN, powered by a network of IPs. Right now, the application supports over 400,000 users. As more people join the network, the need for computing power increases, and so do staking rewards.
The system rewards investors with its native currency — IPX.
Advantages of Tachyon Protocol
- Low network fees allow for higher adoption of the currency, potentially leading to its increased market value
- The network performs well even under heavy traffic loads, resulting in a better user experience and faster transaction verification
- High staking rewards. The number of validators who are ready to invest in a supernode is much lower (compared to easy-entry staking programs), so if you are willing to bet on the system, you could potentially get a steady flow of forging rewards.
The Currency of the Internet (COTI) is an enterprise-level decentralized platform that allows users to create a digital version of any currency. It’s still a small project — as for now, the network uses only a few dozens of nodes.
Like in many fintech systems, COTI uses the consensus protocol to approve transactions and supply computing power for the operation. The system uses a directed acyclic graph (DAG), an alternative to a typical blockchain ledger.https://www.youtube.com/watch?v=MhPzxpLTxhY
Each COTI node has its trust score. It’s based on reliable performance, availability, and speed of execution. If the node correctly performs its operations, is always connected to the network, and doesn’t support fraudulent actions, its trust score will grow — culminating in higher rewards.
The frequency of a reward is determined by the node’s trust — which is why COTI is said to use a Proof-of-Trust system. It’s a determining factor in selecting a validation node over other participants.
The system rewards investors with COTI, its native cryptocurrency. The staking limit is 15,000 COTI Proof-of-Stake coins.
Fantom is a DeFi platform using blockchain to power its real-time transactions. The protocol supports enterprise blockchain networks and widely available dApps.
Fantom’s consensus algorithm is an asynchronous Byzantine Fault Tolerance (BFT) algorithm. The system doesn’t require each network node to verify the transaction, using the mathematically proven lowest possible number of validators. Such PoS minimizes Byzantine fault issues — such as block transactions, processing errors, and high fees.https://www.youtube.com/watch?v=CiKULopMtKk
Advantages of aBFT
- Efficiency: the system uses proof-of-stake and involves few nodes to support the transactions.
- Asynchronous validation: the nodes can verify a transaction after other participants’ approval.
- Higher rewards: fewer staking nodes participate in a transaction, which leads to higher rewards to individual participants.
The staking is rewarded with an FTM, a native currency of Fantom with a total supply of 3 billion (at the time of writing, the circulating supply is 2 billion). To become a validator, an investor needs to stake 3.75 million FTM. The validation is performed through a mobile wallet — no advanced customization required. The main technical requirement is having access to large cloud storage and high computing power.
Ethereum promised to switch its consensus algorithm from Proof-of-Work to Proof-of-Stake. This decision will supposedly allow the network to increase the number of nodes, reduce energy consumption, and remove congestion.
Ethereum 2.0 (the official name of an upgraded system) is the biggest staking project out there. It’s also the most competitive one — in February 2021, there were more than 100,000 validators on the system. With such a competition, average rewards are fractions of ETH (0.0020-0.0075 ETH per participant).https://www.youtube.com/watch?v=ctzGr58_jeI
The staking process
To become a validator, you need to stake at least 32 ETH. The rewards will become usable as Ethereum moves along its roadmap. The upgrade dubbed Serenity will have several phases. In 2020, the community successfully completed the first step — the beacon chain went live after the network acquired 16,834 validators.
The second phase is the acquisition of shards. The operations will no longer have to be approved by the entire network but only by a fraction of nodes, united in shards. Supposedly, it should result in 100 times higher processing speed, lower gas fees, and increased decentralization. So, as the upgrade moves along, the system creates favorable conditions for the mass adoption of Ethereum— which will benefit validators, especially the early ones.
At the concluding stages of the upgrade, the incumbent Ethereum will fully migrate to its ETH 2.0 version and become one of the Proof of Stake coins. All decentralized applications and existing infrastructure will fully rely on the PoS network.
Tezos is a decentralized network that powers dApps and smart contracts. It uses a Turing complete protocol to approve transactions and correct its own errors. Unlike many coins, XTZ is not a fork of another blockchain. It’s written from scratch with the OCaml language. The system even uses its own Liquid Proof of Stake (LPoS).
Validators are rewarded with a native currency — XTZ. The circulating supply of the coin is 877,158,239 tokens.https://www.youtube.com/watch?v=1GxDajT-DH8
The process of validation is referred to as baking. Bakers stake XTZ to receive permission for running validating nodes and receive Proof of Stake coins for each processed transaction.
Right now, Tezos is being used by a range of enterprise-level decentralized applications. The network is among the most popular smart contract providers — which, for PoS validators, could potentially mean high rewards, especially if Tezos' network of DApps keeps steadily increasing.
Synthetix is an Ethereum-based platform for creating a digital version of physical values. The synthetic copies can be immutably linked to a physical commodity for real-time tracking and exchange.https://www.youtube.com/watch?v=vl4WRFo3hjg
To enable an easy exchange of assets, the platform launched Synthetix Exchange — a peer-to-peer marketplace where users sell and purchase synthetic products.
Validators are rewarded with a native currency, SNX. The network of validators powers the marketplace transactions and supports smart contracts execution. In 2020, the reported annual percentage yield of this Proof of Stake protocol was 55,28%.
Cardano is one of the most popular proof-of-stake projects. Its native currency, ADA, has a market capitalization of $48.95B (at the time of the writing). The project is created by one of Ethereum’s co-founders, Charles Hoskinson.https://www.youtube.com/watch?v=Do8rHvr65ZA
Cardano is a provider of dApps — it uses blockchain to support 3 products: Atala SCAN, Atala Trace, Atala PRISM. The first two allow tracing the product’s movement along the supply chain. The third one verifies the data credibility by verification of ID documents, financial statements, etc.
On a more global scale, Cardano works on launching their own ecosystem for dApps hosting and execution. ADA is used to power these transactions, reward the completion of smart contracts, and incentivize contributors.
The minimum required amount for staking is 5 ADA.
Decred is a self-governed blockchain infrastructure; its main product is a Decred wallet for desktop and mobile. The infrastructure is still a new one — an Android app has 48 reviews and only more than 1000 uploads.https://www.youtube.com/watch?v=elfBK5QBVmo
As for now, staking Decred has several benefits. For one, the currency has an increasing exchange rate with BTC. Also, community enthusiasts highly praise the technology behind the wallet — namely, its safety and usability.
A defining feature of Decred is its combination of Proof-of-Work and Proof-of-Stake coins in a single infrastructure. The rewards are distributed across both networks. A part of DCR’s global supply is withheld for staking rewards.
Decred validators are rewarded with DCR (a Decred’s native currency). The current annual yield is 10.2%. To become a validator, the system requires a deposit of 50 DCR. Each validator gets a ticket that provides permission for transaction validation.
Icon is a decentralized platform based in South Korea. It powers local and international dApps and supports smart contracts. The network unites various blockchain protocols, providing access to multiple decentralized services from a single platform.https://www.youtube.com/watch?v=AWTXYZxqxmY
ICON integrates multiple blockchain protocols — to a user, it serves as a point of access to hundreds of decentralized services. Many projects are geared towards verifying data and creating immutable documentation — like issuing blockchain-based driver licenses.
The validation network approves smart contracts and powers operations across ICON. The growth of infrastructure leads to an increased demand for node participants — resulting in higher rewards. So far, the project has been showing a positive growth trend, and some speculate that ICON provides blockchain for governmental projects.
Validators are rewarded with ICX, Icon’s native currency. To participate in the validator program, investors can stake any amount of ICX — but the profit from Proof of Stake coins is directly proportional to the staked amount.
Algorand is a popular decentralized infrastructure for borderless transactions. It provides international transfer services, low fees for worldwide payments, and hosts fintech projects.https://www.youtube.com/watch?v=7NdjivxrDoc
To approve transactions, Algorand uses Pure Proof of Stake — all nodes are equal, there’s no centralized governance. The majority of participants all have equal voting rights. The Algorand doesn’t use vote delegation to avoid potential malicious activities. In other words, you can’t reassign your voting rights to another entity.
Currently, the Algorand networks carry out 1,000 transactions per second. The number of transfers is growing, which is a good thing — more transactions result in more Proof of Stake coins.
The minimum staking limit is 1 ALGO. Rewards are set to be 5.4% of the staking amount per year. The staking process is simple: users should deposit their funds in an ALGO wallet; no additional customization is required.
POS and Mining Power
Proof-of-Stake is a way to save energy — a more efficient alternative to the extremely power-demanding PoW. For a better illustration, to run Ethereum, the network relied on the country worth of energy (5.13 gigawatt per year). The proof-of-stake, for comparison, takes only 2.62 megawatts. That’s a level of a small town, not a country. The more blockchains opt for PoS, the more energy-efficient the crypto industry becomes on the whole. Increasing concerns about the ecological impact of blockchains lead many communities to consider implementing PoS coins — and the trend is likely to continue.
What’s the risk of a Network Attack in Proof-of-Stake?
Systems that use Proof-of-Work, such as Bitcoin, need multiple miners to assure the security of the network. As more miners join in, the same mining rewards are distributed among a larger group of miners, resulting in lower percentage yields. This is even more amplified if the network experiences halving, like Bitcoin does. As rewards get smaller, the network risks the Tragedy of the Commons — a situation where no miners are interested in participating. Due to the lower rewards, over the years, mining has become less attractive to retail investors and remained profitable only for institutional players that are able to cut down the hardware and maintenance expenses, through economies of scale.
As there are fewer miners, it becomes easier for a bad actor to amass 51% of computing power. The attack still requires the same percentage, but due to lower overall hash rate, overpowering other miners would become increasingly more doable.
PoS solves this problem by replacing computing power with cryptocurrency staking. The attacker should hold 51% of the currency for an attack. It’s difficult to do so because transactions are highly visible on the blockchain — so if someone is trying to amass so many tokens, participants will immediately spot the risk. At the same time, a person who holds 51% of all tokens has next to no economic incentive to destroy the network by the attack, hence depreciating the value of his large stake.
Could Bitcoin Change to Proof of Stake?
So far, there were no plans of Bitcoin switching to Proof-of-Stake. There are reasons why the Bitcoin community prefers Proof-of-Work — like the fact that Bitcoin uses universal value (energy) to secure the validity of the transaction, not an intrinsic asset prone to speculations and security trade-offs.
Is proof-of-stake better than proof-of-work?
While proof-of-stake has many advantages over proof-of-work, it’s not a perfect solution. There are several criticisms of the PoS protocol: like the fact that it uses an intrinsic token to approve the validity of the transaction, whereas PoW relies on energy, a more universal value.
Others consider PoW to be more independent — the power is distributed more evenly across the mining community, and users are free to customize their Full Nodes. Finally, security is another argument in PoW’s favor. The ease of confirming the transaction could be used to reverse the system’s rules, and the odds of exploiting the system’s flaws are lower.
When will proof-of-stake be rolled out on Ethereum?
Beacon chain, the first step of Ethereum 2 journey, was deployed in December 2020. However, the full migration hasn’t happened yet — right now, the team is working on introducing a shard chain (the second phase, also known as 1.0, since the count traditionally starts from 0). The full migration of the Ethereum network is projected to take place in 2022-2023. With this being said, there’s no specific timeline; the timing depends on development progress and community involvement.
What are the pros and cons of Proof-of-Stake?
The main advantages of Proof-of-Stake are:
- Saving energy: PoS is an ecologically favorable alternative to PoW. Instead of using energy to validate transactions, Proof-of-Stake uses intrinsic cryptocurrency. By lowering the difficulty of the proof, the network also decreases its energy expenditure.
- Accessibility. A lot of PoS coins have very low staking limits. You can become a validator with just small investments. Proof-of-Work requires powerful devices and a lot of computing power, not to mention technical expertise.
- Lower susceptibility to a network attack. Because of a high-level entry barrier for PoW, the number of miners can decrease as rewards get lower. Rigging a blockchain then becomes easier, because a single entity suddenly needs less energy to bypass the 51% limit.
The disadvantages of Proof-of-Stake are the following:
- Lower legitimacy: in PoW, a miner converts a universal value (energy) into cryptocurrency, hence risking actual resources. In Proof-of-Stake, validators bet on the internal currency. So, the stakes are, ironically, lower — there’s no influx of external value, acceptable outside the network.
- Security issues: PoS relies on the security protocols of the cryptocurrency itself. If the currency that’s used for staking is inherently poorly developed, the network will rely on an essentially useless asset for transaction confirmation.
- Data distribution: many PoS systems, like Cardano and Ethereum 2.0, use shards to increase the transaction speed. However, the system becomes more fragmented and harder to oversee.
Proof of Stake is a necessary alternative for Proof-of-Work. With an expanding crypto market, it’s difficult to imagine the reality where each currency would require enormous amounts of energy to maintain its ecosystem. PoS allows the above-mentioned and other crypto projects to diverge and keep growing without creating an ecological disaster.
For investors, it’s a possibility to generate passive income with few to no limitations. Unlike PoW that requires possession of powerful technology and knowledge, PoS uses intuitive wallets, stake management software, and open-source protocols. It’s open, accessible, and fast.
Of course, there are trade-offs. Being simpler than PoW, Proof-of-Stake has yet to prove its universal legitimacy and withstand its unique security challenges. As PoS networks keep growing, and bigger players like ETH are switching to the protocols, we’ll see new operational challenges and their solutions.
One thing is certain — now is an exciting time to be a PoS investor. Becoming an early validator grants high annual yield — and what’s more fascinating, a much higher interest in the future (which makes it a passive income source). PoS networks actively incentivize their early participants — so the real financial pay-off of PoS might only become apparent in 5, 10, 20 years time. And since PoS is already going strong, hypothesizing its future growth is that much more exciting.