The huge electricity bills incurred due to mining of coins using Proof of Work consensus mechanism prompts the miners to sell off their cryptocurrency to pay for the bills. This causes a depreciation in the value of the currency which ultimately results in low profitability of mining. To counter this disadvantage, Proof of Stake consensus mechanism was introduced.
As the name suggests, Proof of Stake consensus mechanism gives validation opportunities to miners who possess the highest number of coins. The consensus is achieved by necessitating staking a number of the user’s tokens to be in the race of being selected for authenticating blocks of transactions and get incentives for the same. The question is how it ensures ‘decentralization’ when it is money that will allow a miner to stand a chance to be chosen for ratifying transactions.
Here, the distributed consensus is achieved by making the validation a two-step process. The first step is to consider only those miners, also known as forgers, who have a stake on the network. The second step involves a semi-random selection process where forgers are selected randomly. Miners with higher stake have a higher chance of being selected.
The question here is, how much of the relevant cryptocurrency does a person need to keep on stake and how does it ensure protection against malicious desires of any entity?
There is no fixed minimum amount that a person could stake, it differs across different Blockchain networks. Each validator is required to own a stake in the Blockchain network. It means, he or she should deposit an amount of crypto-currency into the system that is locked away into a virtual safe. It is then used as a collateral to vouch for the authenticity of the block.
Why PoS provides them with a higher stake is because they have more to lose if the network is affected. Their malicious act can result in them losing a greater amount of money than someone with less stake. It is similar to the situation where you’d put in extra efforts to keep your business afloat as compared to any other person because you have your money in it.
The miners earn money in the form of transaction fees in PoS consensus algorithm instead of freshly curated currency, like in the case of PoW consensus mechanism.
We come down to the question, is PoS consensus mechanism actually the best way to achieve a distributed consensus?
In case, a miner with high stakes in the network loses his private key to a malicious entity, he or she can use the consensus mechanism to falsely validate a new Block. Also, since most of the decision-making power, both technical and administrative, lie with the miners who have a higher stake, they can implement changes to the system without considering the will of the community, businesses, miners and developers. This entirely disrupts the true essence of a distributed ledger by handing over the control over the network to a richer party. This system makes the rich richer by providing them with more mining opportunities.
With the backdrop of some major disadvantages, is it possible to have a consensus mechanism that can be beneficial without being accompanied by substantial drawbacks?