Consensus via Proof of Stake (PoS)

Historically, proof of work was not the first consensus algorithm proposed. Preceding the introduction of proof of work, many researchers had proposed variations of consensus algorithms based on financial stake, now called proof of stake (PoS). In some respects, proof of work was invented as an alternative to proof of stake. Following the success of Bitcoin, many blockchains have emulated proof of work. Yet the explosion of research into consensus algorithms has also resurrected proof of stake, significantly advancing the state of the technology. From the beginning, Ethereum’s founders were hoping to eventually migrate its consensus algorithm to proof of stake. In fact, there is a deliberate handicap on Ethereum’s proof of work called the difficulty bomb, intended to gradually make proof-of-work mining of Ethereum more and more difficult, thereby forcing the transition to proof of stake.

At the time of publication of this book, Ethereum is still using proof of work, but the ongoing research toward a proof-of-stake alternative is nearing completion. Ethereum’s planned PoS algorithm is called Casper. The introduction of Casper as a replacement for Ethash has been postponed several times over the past two years, necessitating interventions to defuse the difficulty bomb and postpone its forced obsolescence of proof of work.

In general, a PoS algorithm works as follows. The blockchain keeps track of a set of validators, and anyone who holds the blockchain’s base cryptocurrency (in Ethereum’s case, ether) can become a validator by sending a special type of transaction that locks up their ether into a deposit. The validators take turns proposing and voting on the next valid block, and the weight of each validator’s vote depends on the size of its deposit (i.e., stake). Importantly, a validator risks losing their deposit if the block they staked it on is rejected by the majority of validators. Conversely, validators earn a small reward, proportional to their deposited stake, for every block that is accepted by the majority. Thus, PoS forces validators to act honestly and follow the consensus rules, by a system of reward and punishment. The major difference between PoS and PoW is that the punishment in PoS is intrinsic to the blockchain (e.g., loss of staked ether), whereas in PoW the punishment is extrinsic (e.g., loss of funds spent on electricity).