What Is Ethereum Proof-of-Stake?

By Gaurav Roy

Proof of stake (PoS) is the underlying mechanism for Ethereum’s consensus algorithm. For those unversed about this change, in 2022, Ethereum officially switched to the PoS mechanism, which is believed to be less energy-intensive and provides a platform for implementing new scaling solutions.

In this article, Ledger Academy will help you understand the intricacies of Ethereum’s PoS consensus algorithm in a simple yet concise manner, so let’s start!

What Is Proof of Stake (PoS)?

Proof of Stake (PoS) is a type of consensus mechanism that is used to secure blockchain networks. Consensus mechanisms are the backbone of all blockchains, as the underlying rules that determine how a network functions.

What’s a Consensus Mechanism?

Let’s start by understanding the idea of consensus. Generally speaking, consensus is a process used to reach an agreement among a group of people. 

In terms of blockchain, the consensus is the process by which a group of nodes on a network determines which blockchain transactions are valid. A consensus mechanism is the methodology to achieve this agreement.

So, a blockchain is a digital ledger of distributed, decentralized, and often public transactions. Each transaction on a blockchain is recorded as a ‘block’ of data and must be verified by peer-to-peer computer networks before being added to the chain. This system helps secure the blockchain against fraudulent activity and double-spending.

There are many types of consensus mechanisms. Each work in different ways but have one purpose: to ensure that transaction records on a blockchain are true and honest. Proof of Stake (PoS) is one of the most popular consensus mechanisms.

PoS Consensus Mechanism

A Proof of Stake (PoS) network is a system that uses staked cryptocurrency to secure itself. Every validator node must have “locked up” a security deposit consisting of ETH on the network in order to participate in consensus. By using the crypto as collateral, it compels the nodes to behave properly and helps to keep the network secure.

What Is a Validator?

A validator node is a vital part of a blockchain network. It is responsible for participating in the consensus-building process of a Proof of Stake blockchain. Validator nodes vote on the authenticity of a new block of transactions, thus communally ensuring new blocks are valid before permanently adding them to the blockchain. Meanwhile, one specific node is selected as the “block proposer” for the current time slot. This node is responsible for building the new block of transactions and broadcasting it to the other nodes to be verified.

How Are New Blocks Verified?

Each validator node has the same copy of the blockchain’s history. Using this common history, they assess whether new blocks of transactions are valid. Then vote on this point as a group before adding them to the main chain. 

How does the Ethereum Network select Validators?

The validator selection in Ethereum’s Proof of Stake (PoS) system is based on a validator’s stake in the network. To explain, the greater the stake, the more likely that node will be selected to add the new block to the chain. 

Ethereum Staking Requirements

In the Ethereum PoS system, each validator must stake the network’s native tokens (in this case, 32 ETH). The requirement to stake ETH incentivizes validators to act in the network’s best interests. This because validators stand to lose their investment if they try to subvert the system, or fail to validate reliably and effectively.

Through the Ledger Live app, you can easily and securely stake Ethereum coins to a validator and start earning ETH rewards, passively.

What Is Finality? 

Finality is the time it takes to protect a transaction on the blockchain. Finality guarantees that a particular block in the blockchain cannot be changed or reversed. The transactions within the block are therefore immutable. 

Even after a transaction is confirmed as part of the most recent block, it doesn’t mean it can’t be changed or undone. For a short period that follows, a transaction may be vulnerable to attacks from bad actors who try to exploit weak points in the blockchain.

Block Finality Under Ethereum Proof of Stake

Under Proof of Stake (PoS), Ethereum uses “checkpoint” blocks to manage validator votes. The first block of each epoch (a period of 32 slots where the validators propose and attest for blocks and is of 6.4 minutes) is a checkpoint. 

As well as voting for the validity of individual blocks, validators subsequently vote for whole checkpoints. If the checkpoint receives votes from at least two-thirds of the total staked ETH, it is upgraded. The most recent checkpoint then becomes “justified.” The earlier checkpoint, which is already justified because it was the target in the previous epoch, is now upgraded to “finalized.” 

If an attacker wants to revert a finalized block, they would therefore have to be willing to lose at least one-third of all the ETH that’s been staked.

What Is Slashing?

Slashing is a disciplinary system used by PoS protocols to penalize validators for any harmful or irresponsible behaviors. This usually involves the network deducting some of their security deposit (their initial staked coins).

To understand it further, let’s take a look at some of the key elements of slashing:

Incentivizing Validators

In the Ethereum PoS system, the sum of crypto staked by validator nodes (32 ETH) acts as a security deposit. Since the amount can be “slashed” by the network (if a validator fails to behave appropriately) validator nodes have a vested interest in behaving in a way that benefits the blockchain.

Deterring Downtime

One of the most common behaviors that lead to slashing is downtime. The term “downtime” refers to the period of time during which a validator is offline and unable to produce new blocks. This can be due to network delays, software issues, or hardware problems. 

When a validator is down, they cannot participate in the consensus process. Since this is detrimental to the overall functioning of the network, it is penalized by the network via slashing.

How Proof of Stake (PoS) Differs from Proof of Work (PoW)?

Both PoW and PoS are types of consensus mechanisms that allow cryptocurrency networks to operate with no central governing authority. But they achieve this in different ways and have varying degrees of security and reliability.

Proof of Work: Security via Energy Consumption

With Proof of Work (PoW) consensus mechanisms, a new block can only be added if the block hash is calculated via an incredibly complex equation. It can take trillions of guesses before that value is randomly discovered by a miner. Which can consume a lot of power. Only the miner who achieves this first will confirm the block and be rewarded. In this system, energy is the resource the network uses to secure itself. The huge amount of energy required to overcome the blockchain’s consensus mechanism is a key deterrent for bad actors.

Proof of Stake: Security via Staked Coins

A proof-of-stake network like Ethereum secures itself via staked cryptocurrency. Instead of expending computing energy to solve a puzzle, the nodes validating new transactions stake their own value as collateral. These nodes then run efficiently and honestly to avoid losing that collateral. 

Meanwhile, any bad actor wishing to gain control over the network would need to own more than 51% of the coins staked at that time. Controlling 51% of all staked coins on the network is so difficult that it makes such an attack extremely unlikely. This is how the consensus mechanism that secures Proof of Stake networks works.

Ethereum Proof of Stake

With the recent Merge now complete after years of work, Ethereum’s transition to Proof of Stake is now active. But the process as a whole is not complete, so its full impact is still not seen. Ethereum 2.0 is still yet to arrive.

At the time of writing, staked ETH and staking rewards are yet to be unlocked. Moreover, we are yet to see the implementation of some major new scalability options, such as sharding. Only time will tell exactly how secure the network is under this new consensus mechanism.

Understanding Ethereum’s Proof of Stake consensus mechanism will help you make informed decisions about interacting with the Ethereum blockchain through the Ledger ETH wallet. Knowledge is power, and Ledger Academy is here to act as your guide. Unraveling the complex yet powerful consensus mechanism securing the behemoth blockchain that is Ethereum. 

Knowledge is Power.