Proof of Stake Alternatives Developer Should Know

According to Statista, global spending on blockchain solutions is projected to grow to $19 billion by 2024. However, despite its numerous applications across a multitude of industries, there is still a large debate over what type of blockchain protocol is most effective.

At its core, blockchain technology is designed to act as a public ledger where information can be recorded and distributed without being manipulated or edited. Every blockchain must strive toward three main features: security, decentralization, and scalability. Yet, not all blockchain protocols achieve this task to the same degree.

Each blockchain utilizes an underlying consensus mechanism designed to support the verification of the “truth” of every transaction on the network. The consensus mechanism’s main purpose is to ensure that the next block in the blockchain is agreed upon by most network nodes. Furthermore, these mechanisms make it more difficult to fork the blockchain if a majority of the network does not support the fork.

Currently, the two most common blockchain consensus mechanisms are proof of work (PoW) and proof of stake (PoS). Proof of work is the algorithm that powers several of the world’s most prominent cryptocurrencies, including Bitcoin and Ethereum. However, one key disadvantage of PoW is that it needs miners to expend computing resources in order to produce new blocks. This raises questions regarding decentralization and scalability.

Proof of stake was implemented to overcome many of these issues, but when you dig a little deeper, it’s clear that PoS suffers from many of the same problems; they just manifest themselves differently.

What Is the Problem With Proof of Stake?

Created as an alternative to Proof of Work, proof of stake relies on cryptocurrency owners to validate block transactions based on the number of coins a validator stakes. For this to function effectively, coin owners offer up their tokens as collateral for the chance to validate blocks on the network. In turn, Proof of Stake reduces the amount of computational work needed to verify blocks and transactions, which is one of the primary reasons why it was suggested as a successor to PoW.

With that said, the PoS consensus mechanism is fundamentally flawed when it comes to decentralization, as the people who stake the most coins control the validation rules and receive a reward for doing so. As a result, PoS erodes decentralization and is inherently open to abuse from more oversized holders, making them less secure, a notion that ex-CEO of Twitter Jack Dorsey echoes. Therefore, PoS goes against two of the three cornerstones that blockchain technology is designed to achieve.

This was made evident by the recent collapse of Terra (Luna). Terra was developed on top of Cosmos and used a type of PoS known as Delegated Proof of Stake (DPoS). However, DPoS relies on only a few sets of validators to confirm transactions, which means that the project lacks transparency and is not truly decentralized. This is arguably one of the primary factors contributing to Terra’s inevitable collapse. With that said, let’s look at a few of the most promising alternatives to PoS (excluding PoW).

Proof of Time

Proof of time (PoT) is a decentralized consensus mechanism pioneered by Analog. Instead of relying on a handful of validators based on the amount of computational power or staked coins they possess, Proof of time’s validating capacity based on each node’s ranking score and “fixed stake.” The fixed stake system demands that each validator holds a specific amount of tokens to participate in the network. However, possessing more coins than the fixed amount will not derive any preference. Furthermore, time nodes (validators) can improve their ranking score by validating time data more accurately, which means obtaining the “truth” becomes a mutually beneficial goal for all parties. This results in a more inclusive, secure, and decentralized network compared to PoS and PoW.

Proof of Authority

Proof of Authority (PoA) blockchains are validated by approved accounts that meet certain qualification criteria. These criteria typically include verifying the validator’s identity on the blockchain and in the public domain, such as proof of the validator obtaining a public notary license. The procedure for establishing authority must be completely uniform to not give preference to any person or group of people. This mechanism offers much higher throughput and scalability than Proof of Stake since blocks are generated in a predictable sequence based on the number of validators. However, the main risk is high levels of centralization (and a lack of anonymity), which makes it unsuitable for many blockchain applications.

Proof of Burn

Proof of Burn (PoB) is a consensus mechanism that requires miners to send tokens to a burning wallet so they can have the chance to validate the next block. In other words, miners must sacrifice a part of their assets in the hope that they will become a validator and earn rewards (amassing more than the amount they burnt). The idea of ‚Äč‚Äčthis system is that it incentives miners to remain involved in the project, preserving the network.

Nonetheless, in many ways, PoB is susceptible to the same manipulation as PoS since the more coins you burn, the higher your chance of being selected as a validator. That said, miners must be careful not to burn too many coins; otherwise, they will operate at a net loss.

Conclusion

While Proof of Stake was designed to address many of the flaws that plagued Proof of Work mechanisms, blockchains that use proof of stake are unfortunately susceptible to many of the same vulnerabilities. Since “whales” can control the system by accumulating processing power or staking coins, PoS systems become less transparent, less secure, and more centralized. As a result, new solutions, such as proof of time, are being developed in order to create a more inclusive, secure, and scalable blockchain without compromising on decentralization.

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