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Proof-of-stake (PoS) is a mechanism used by the Ethereum protocol to determine the correct order of events within its blockchain. This allows existing peers to agree on the state of all participants’ asset balances and all available smart contract programs on Ethereum over time without needing a central authority.
In PoS, network participants called validators are randomly* chosen to propose new blocks into the transaction record. To become a validator, an entity must lock up 32 ETH in a contract. If over 50% of validators act honestly, anyone attempting to break the protocol rules will face a penalty known as 'slashing,' where their locked funds are automatically reduced by the protocol enforced by an honest majority. This risk of loss discourages bad behaviour throughout the ongoing operations of the Ethereum network.
Unlike proof-of-work (PoW), where miners risk the external cost of energy and hardware, validators in PoS risk their locked, or “staked”, ETH. Since this stake is internal to the Ethereum network, PoS doesn’t require the consumption of resources like energy. This makes PoS more energy-efficient.
However, PoS has drawbacks. If an entity gains control of over 50% of the stake, they can dominate system operations, making it infeasible to recover from such an attack. Additionally, since stake is internal, an outsider cannot verify the correct blockchain objectively and therefore must trust an existing network member, meaning PoS relies to a much higher extent on trust than PoW.