Blox Basics: What is Proof-of-Stake

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The arrival of the Onyx testnet brings the crypto and blockchain community rocketing into the next level for Ethereum, the beacon-chain mainnet. This multi-year plan lays the groundwork for the new Ethereum 2.0, an entirely new blockchain based on the proof-of-stake consensus supported by a network of validators.

In this blog post we explain what is Proof-of-Stake (PoS) and why it has become the cornerstone consensus mechanism for the most exciting multi-year plan in blockchain history.

Before we go into PoS, let’s refresh your memory on PoW (Proof of Work).

 
What is Proof-of-Work?
  • Used as the primary consensus and governance for popular blockchains like, Bitcoin, Ether and Ripple.
  • A large distributed network of miners collectively compete to solve complex equations. Solving equations earns miners a reward.
  • PoW requires miners to support and secure a blockchain network.
  • Miners mint cryptocurrencies (BTC, ETH) and introduce them into circulation.

 

Take a look at the image below.

 

Jack needs to send Eth to Alex by signing his private key to authorize his transaction. Jack’s activity is then broadcasted to the Ethereum 1.0 network for miners to verify and turn into a block. 

 

Miners will receive Jack’s transaction and will verify validity before adding the block to the chain. This is to ensure the health of the network and that only valid transactions are added, while invalid ones are removed. For their effort, they receive a reward, and Alex receives the crypto sent by Jack. 

While this model has worked for almost a decade, it is not without its challenges. 

 

 

Challenges with Proof-of-Work
Several challenges have forced blockchains like Ethereum, to build a better blockchain that is resistant and can overcome existing limitations. Most notably is the speed and energy inefficiency of PoW-based blockchains. When looking at transactions speed per-second (TPS), they are just too slow to handle mainstream transactions. Moreover, the amount of energy required to mine cryptocurrencies is alarmingly high.

In addition to speed and energy concerns, security can also disrupt the success and fairness of PoW blockchains. The infamous 51% attack is where one organization is in control of more than 51% of the blockchains hashing power. While this attack method is very financially expensive, it can cause malicious activities that ultimately harm the health of the network. 

 

 

What is Proof-of-Stake?

Now that you have had your PoW and mining refresher, let’s understand Proof of Stake. For this explanation, we will use Ethereum 2.0’s PoS blockchain as our example. Click this link to read more about Ethereum 2.0 

  • PoS Requires validators, not miners, to govern the blockchain and awards them for their work.
  • Validators are randomly selected to approve (attest) block creation on the chain.
  • Validators that are online and active when attesting earn a reward. 
  • To become a validator requires locking 32 Ether into an Ethereum smart contract.
  • Malicious behavior, bad actors and inactive validators can receive penalties and slashes.

 

 
PoW challenges are solved by PoS:
  • Faster network transaction speeds
  • More energy-efficient than PoW
  • Resistance to malicious and fraudulent activity
  • Greater sustainability and opportunity for true trustlessness 
 

To create an additional layer of security, Ethereum 2.0 PoS wants to make it costly for malicious validators, and 32 Eth has great value. In order to participate in supporting and secure the network, validators are required to lock their 32 Eth into a digital hot wallet. 

 

When a validator completes the task of attesting blocks, they earn a reward, which is added into their wallet. Those who choose to stake can earn a passive-income for idle ether. However challenges exist such as fraudulent activity. 

 

When a validator is chosen to attest but is offline, they will receive a penalty and will see their Ether balance reduced. If any malicious activity occurs, validators can whistleblow on a validator. The validator responsible will be slashed and likely removed from the network and its wallet emptied. For the whistleblowing validator, they earn rewards for their positive actions. 

 

 

Why are Validators important for PoS?
  • They support Eth 2.0 network through validating and staking.
  • Validators form and govern the network by attesting and proposing new blocks.
  • Validators are responsible for communicating between the client/user and the blockchain layer.
  • The Eth 2.0 PoS network requires a certain quantity of validators and staked Ether for it to operate effectively (524,000 Eth or approx 16,00 validators).
  • Validators earn rewards and penalties for their activity on the network.

 

At this point it’s clear that Proof of Stake and validators form an essential symbiotic relationship that allows Ethereum 2.0 to operate in an entirely new environment, but still offer the same safety and security, whilst introducing speed and scale.

 

Similar to miners, validators form the distributed and decentralized network of this new Ethereum 2.0 blockchain. Their participation is two-fold, it protects the ideals and security of the network and is rewarded for online dedication and for participating through staking. 

Here is an image of how distributed the new beacon chain is world wide, as of June 14th, 2020.

Tweeted by Vitalik Buterin, June 14th, 2020

Staking validators send their 32 Eth into a smart contract on Ethereum 1.0. The said 32 Eth is referred to as an “effective balance”, and this is where penalties and rewards are taken from and added to. 

If you are interested in learning more about crypto staking rewards and penalties, check out this blog post!

 

PoS Validator Diagram

The simple diagram below shows multiple staking users with their digital wallets connected to the network. Thousands of users may be connected with hundreds (or thousands) of network validators. 

Each validator staking 32 Eth is randomly selected to complete its task, such as attest and proposing a block. Essentially, stakers use validators as hosts for their staked ether.

The network validators must each approve and monitor the various network activity. Being online and attesting is the key to earning rewards, and that takes a great staking service.

Once completed, the network rewards the validator appropriately. The validator service provider is rewarded a percentage from the network, which is then distributed to stakers and/or validators. (In cases where you users don’t use a staking service, they receive all the reward and risk)

 

Some that choose to stake have the option of doing it alone or by using a dedicated provider as a host for your 32 Ether stake. The earlier a user stakes and longer they lock in their funds, the greater the total reward will be.

 

 

The validator client a user stakes with, whether it be a DIY home-setup or using a staking service provider, is one of the most important choices users must make. If a validator is offline or approves an invalid block they receive a penalty or can be slashed. Mitigating these events is essential, such as slash protection to safeguard investments. 

 

If you are interested in learning more, feel free to review our Blox Blog or website FAQ! 

 

We hope that you enjoyed this quick lesson in understanding Proof-of-Stake and its relationship with the new Ethereum 2.0, staking and validators. 

 

Written by: Team Blox 

 

 

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