Ethereum Proof-of-Stake: Everything to Know
By Beluga Research September 19, 2023
- Ethereum's proof-of-stake (PoS) cryptocurrency consensus mechanism secures the network and creates new blocks based on the amount of ether held by validators
- Created by Vitalik Buterin in 2013, Ethereum introduced "smart contracts" and "decentralized applications" (dapps) to blockchain
- Ethereum has transitioned from proof-of-work (PoW) to PoS to address scalability and energy concerns
- This transition to PoS introduces energy efficiency, scalability and security advantages, but also faces challenges
Ethereum's proof-of-stake (PoS) cryptocurrency consensus mechanism secures the network and creates new blocks based on the amount of ether held by validators. While PoS is a general consensus mechanism, Ethereum PoS refers specifically to the PoS mechanism adopted by the Ethereum blockchain in an upgrade. This transition is a significant development for Ethereum and the broader blockchain community, as it addresses some of the scalability and environmental concerns associated with PoW-based blockchains.
A Brief History
To address scalability and energy concerns, Ethereum began transitioning from PoW to PoS, as PoS does not require resource-intensive puzzles. The goal was to make Ethereum more scalable, energy-efficient and environmentally friendly. The transition started with the introduction of "Casper" in 2015.
Casper, a hybrid PoW/PoS consensus algorithm, aimed to gradually shift Ethereum's consensus mechanism towards PoS. The plan was to introduce PoS alongside PoW and reduce reliance on PoW until the network solely operated on PoS. Extensive research and development led to a major Ethereum upgrade called "Serenity."
Ethereum Proof-of-Stake: Everything to Know
In Ethereum's transition to a PoS consensus mechanism, validators propose and validate blocks instead of miners, and these validators must lock up ether as a stake to participate. This stake acts as collateral, incentivizing honest behavior and protocol compliance.
Validators are selected based on a random algorithm that considers the amount of ether staked. Selection occurs in "epochs" of roughly 6.4 minutes, with multiple slots in each epoch. Validators then take turns proposing and attesting blocks, earning rewards or facing penalties based on performance. Honest validators receive additional ether, while malicious or offline validators may lose part of what they staked.
The "Beacon Chain," launched in December 2020, coordinates validators and manages consensus. It tracks validators, assigns attestation duties and finalizes blocks. The Beacon Chain includes the "RANDAO" (Random Number Generator DAO), ensuring randomness in the consensus process.
"Shard chains" complement the Beacon Chain, enhancing Ethereum's scalability. They enable parallel processing of transactions and smart contracts, significantly increasing transaction throughput. Each shard chain operates independently, processing transactions and maintaining its state. The Beacon Chain coordinates and finalizes shard chains' outputs.
To understand Ethereum's PoS, it is also important to grasp the concept of a "consensus mechanism" in a blockchain network. Consensus is the process by which participants agree on the validity of transactions and associated order in the blockchain. In PoW systems like Bitcoin, miners compete to solve complex mathematical puzzles to validate transactions and add blocks. However, PoS works differently.
Specifically, in PoS, validators are chosen to create new blocks and secure the network based on the number of cryptocurrency tokens they hold and are willing to stake as collateral. Validators' probability of being chosen to validate the next block is proportional to the number of tokens they hold and stake, rather than computational power. This shift introduces several unique aspects to the Ethereum network.
PoS offers energy efficiency compared to PoW. In a PoW system, miners continuously use computational power, consuming significant electricity, and this energy consumption raises concerns about the environmental impact. In contrast, PoS reduces energy requirements as validators are not competing through computational power. Validators only need to keep nodes running and maintain online presence to participate in block validation.
Another unique aspect of Ethereum PoS is "slashing." Slashing penalizes validators for malicious behavior or violating network rules, and validators may have a portion of staked tokens confiscated as punishment. Slashing deters dishonest behavior and ensures network security and integrity. Validators have a financial incentive to act honestly and follow consensus rules to avoid losing staked tokens.
The Beacon Chain selects validators to propose and validate blocks, as well as introducing shard chains to process transactions in parallel, improving scalability. Validators can choose to participate in shard chains, increasing transaction throughput and network capacity.
The transition to PoS changes rewards and incentives for validators. In PoW, miners are rewarded with newly minted cryptocurrency and transaction fees. In PoS, validators are rewarded with transaction fees only. The issuance of new ether is significantly reduced, potentially decreasing the overall inflation rate. This change incentivizes validators to prioritize network security, efficiency and the network's best interest.
- Energy Efficiency - Using PoS consumes less energy compared to PoW because it does not require extensive computational power for mining. Instead, validators are selected based on the amount of cryptocurrency they hold and stake as collateral.
- Scalability - PoS improves Ethereum's scalability by eliminating resource-intensive mining, resulting in faster transaction confirmations and higher throughput. This is crucial as demand for decentralized applications (dapps) and DeFi platforms grows.
- Security - PoS introduces a security model that aligns validators' interests with the network's security. Validators risk losing what they staked if they act maliciously or validate fraudulent transactions, while PoS also reduces the risk of a 51% attack.
- Accessibility - The use of PoS is more accessible compared to using PoW. Anyone holding the native cryptocurrency can participate as a validator and earn rewards by staking tokens, which promotes decentralization and widens participation.
- Centralization Tendencies - PoS introduces the risk of centralization, where validators with larger stakes have more influence. Mechanisms are needed to mitigate this risk and ensure a decentralized PoS ecosystem.
- Initial Distribution - The initial distribution of tokens in a PoS system can impact long-term dynamics. Concentrated token ownership can lead to disproportionate control and hinder decentralization, so fair distribution is essential.
- Nothing at Stake Problem - In PoS, validators can support multiple branches of the blockchain, potentially leading to network instability. Techniques and penalties are used to discourage validators from engaging in this behavior.
- Security Assumptions - PoS relies on the assumption that a majority of validators act honestly, but collusion or malicious behavior can undermine the consensus mechanism. Robust mechanisms are needed to detect and mitigate such behavior.