How Proof of Stake Works: Everything You Need to Know About the Next-Generation Consensus Mechanism

How does Proof of Stake work? Instead of computational power, this consensus algorithm relies on the amount of coins that participants are willing to lock in the network. This fundamentally distinguishes PoS from traditional Proof of Work and opens up new possibilities for energy efficiency, scalability, and blockchain security.

Working Principle: From Theory to Practice

Introduced in 2011 as a solution to the problems of Proof of Work, Proof of Stake works based on the principle of randomly selecting a validator from the network. The system takes into account several factors: the amount of staked coins, the duration of their staking, randomization, and the financial backing of the node.

When a participant wants to join the validation process, they lock a certain amount of coins in the network. The more coins are staked, the higher the likelihood of being chosen to create the next block — a process called forging. However, the system does not operate on the principle of “the richer, the more likely”: special randomization and staking duration selection mechanisms are used to prevent the dominance of certain participants.

Validator Selection Methods

Random block selection implies searching for nodes with the lowest hash and simultaneously the highest staking amount. This approach, although fair, is predictable: the volume of coins for each participant is publicly available.

Staking Time Selection works differently: validators are selected based on the duration their tokens have been in the blockchain. The duration is calculated as the product of the number of days and the stake size. After a block is created, the counter is reset, which prevents the frequent re-election of the same participants.

Validation Process and Rewards

The selected validator checks the correctness of transactions, signs the block, and adds it to the chain. For this, they receive a portion of the fees from the transactions in the block, and sometimes additional rewards in coins.

If a validator wants to exit the system, their rewards and stake are locked for a certain period — this allows the network to verify whether the participant has added fraudulent blocks. If fraud is detected, the validator loses a portion of their funds ( the process is called “slashing” ). Such an economic incentive protects the network from dishonest actions.

Which networks use Proof of Stake

After the migration of Ethereum to PoS as part of the Ethereum 2.0 update, this mechanism has become the standard for new blockchains. Today, PoS is used by:

• Solana
• Avalanche
• Polkadot
• BNB Chain
• BNB Smart Chain

Each network adapts the mechanism to its needs, creating its own variations of the algorithm.

Advantages of PoS over PoW

Energy efficiency is the main advantage. The cost of participation depends on the economic costs of staking, rather than the energy costs of solving mathematical puzzles. It is incomparably more economical than Proof of Work.

More accessible decentralization. Running a node no longer requires expensive mining equipment. Anyone can lock their coins and participate in validation, which lowers the entry barrier and helps to distribute the network.

Scalability without limits. Since the network does not depend on the physical capacities of miners, adding new validators is much easier and cheaper.

Economic security. A validator risks their own funds — if the network detects fraud, they will lose more than they earn. Thus, dishonest behavior becomes economically unfeasible.

Adaptability. Proof of Stake is easily modified to suit different tasks and needs of various blockchains, which has allowed for the creation of many variations.

Disadvantages and Risks of PoS

Despite the advantages, the mechanism has significant drawbacks.

Fork Issues. With PoS, there is no economic penalty for validating both sides of a fork — unlike PoW, where it requires enormous energy costs. This makes it easier for attackers to target the network during a split.

Barrier to Entry in Staking. Although PoS is more accessible than PoW, participants still need the native tokens of the blockchain. Often, effective staking requires significant investments, which can exclude users without capital. In PoW, anyone could work on cheap equipment or join a pool.

Vulnerability to a 51% attack. Although both mechanisms are vulnerable, PoS is more sensitive to this risk. If the token price drops or the blockchain has low capitalization, an adversary could theoretically buy more than half of the tokens at a low price and take control of the network.

Variations of Proof of Stake

Proof of Stake how it works in each blockchain depends on its specifics. Various modifications of the algorithm have developed:

DeleGated Proof of Stake (DPoS)

Allows users to stake coins without becoming a full validator. Instead, they act as delegates: they contribute funds through a chosen validator and receive a portion of its rewards. Delegates choose validators based on the size of the proposed incentive and reputation.

Nominated Proof of Stake (NPoS)

Used in Polkadot. It is similar to DPoS, but with a key difference: the nominator risks losing their funds if the validator they choose turns out to be dishonest. Each nominator can choose up to 16 validators, and the network distributes their coins among them equally. Polkadot applies game theory to validator selection.

Proof of Staked Authority (PoSA)

Uses BNB Smart Chain. Combines Proof of Authority and Proof of Stake: a group of 21 active validators, selected based on the amount of delegated BNB, takes turns creating blocks. This list is updated daily.

Results

From the era of Bitcoin and its computational power, the blockchain community has transitioned to economic consensus. Proof of Stake demonstrates the effectiveness of this approach: networks have gained cost-effectiveness, scalability, and fairness. While Proof of Work is still used by Bitcoin and several other projects, Proof of Stake is becoming the standard for the next generation of blockchains — and this change will be with us for a long time.