Polkadot uses the Proof of Stake (PoS) mechanism as an alternative to the Proof of Work (PoW) consensus mechanism. The different security models, energy consumption and advantages of both mechanisms are still hotly debated.
What is Proof of Stake?
Proof of Stake (PoS) is a consensus mechanism that relies on people who hold tokens to act as validators. It is an alternative method to Proof of Work (PoW), which Bitcoin and most of the earlier blockchains use. PoW relies on computing power to create blocks, while PoS validation comes directly from token holders acting as validators.
PoS is becoming widely adopted by major blockchains such as Polkadot, Cosmos, Avalanche, Tron, Tezos and of course Ethereum 2.0 after the merge. There is much debate over whether PoW or PoS is the most secure. Only time will tell if PoS will become the reigning consensus mechanism of the blockchain future.
How Does Polkadot (DOT) Proof of Stake Work?
Polkadot is a multichain blockchain-based network that can process transactions for various chains in parallel. It provides security for the network by using a relay chain as layer 0. Polkadot uses an NPoS (nominated proof-of-stake) election mechanism that includes the roles of validators and nominators. The process is designed to increase chain security through allowing stakeholders to maintain it by securing it with the help of a validator node.
The higher the number of backing votes, the more likely a validator can receive a stake for their time. The supporting stakeholders then can become part of the voting process to decide on building blocks, validating parachain blocks and guaranteeing finality.
Polkadot can claim to be one of the leading secured proof-of-stake platforms, with stakers receiving a reward of around 13% annually. The market cap is around $14 billion, with over 50% of DOT tokens being staked.
Advantages of Proof of Stake
There are a few clear advantages that Proof of Stake blockchains have over Proof of Work chains. These include low energy costs, time to finality, resistance to 51% attacks and safety.
1. Added Security for Smaller Blockchains Against 51% Attacks
Smaller PoW blockchains have been subjected to multiple 51% attacks like ETC and BSV. In PoS a 34% stake is required to stall the network, however 67% stake is required to perform a double spend. Because of slashing, in theory an attacker could only attack the chain for a short time and it is probably more difficult to profit from the attack. However the implications of a successful attack might be more severe. Some argue that larger PoW chains, like Bitcoin, are actually the most secure but for newer smaller chains entering the space today, PoS tends to be easier to keep secure.
2. Low Energy Cost
Proof of Stake is much more energy-efficient than Proof of Work. In proof of stake, the cost of participation is determined by the economic cost involved in staking coins instead of the computational cost needed to solve puzzles.
3. Time To Finality
An advantage of PoS that is difficult to achieve with PoW is deterministic finality. On PoW, transactions are never final, but their probability of being legitimate increases exponentially as more blocks get added to the chain. This means that on PoS chains that have deterministic finality, once a transaction is final, it is final (for better or worse). Fast finality is a highly sought after feature in blockchains as people normally don’t want to wait more than a few seconds to know if their transaction was successful.
4. Safety
Staking incentivizes validators on the network not to process fraudulent transactions. When the network detects a fraud, validators lose their stake and will have to wait a while before they can catch up with confirmed transactions again. From this logic, legitimate participants would never engage in fraud as the amount lost would always be more significant than what is gained.
Summary
Bitcoin and the PoW consensus mechanism was a revolution in 2008. But given that more new blockchains are adopting PoS and Ethereum 2.0 will be PoS, the industry looks to be pivoting in that direction.
This is one reason why Pendulum chose to build on Polkadot, as the DotSama ecosystem has a track record of top tier blockchain security through utilizing PoS. We will integrate with the most advanced technology for maximum security, maximum longevity to give fintech companies maximum efficiency when using fiat on DeFi.
About Pendulum
Building the missing link between fiat and DeFi through a fiat-optimized smart contract blockchain based on Polkadot’s Substrate. Allowing traditional finance fiat services to integrate with DeFi applications such as specialized forex AMMs, lending protocols, or yield farming opportunities. Developed by SatoshiPay.
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