What is Proof-of-Stake (PoS)?

You might have heard that the next evolution of the Zilliqa network, Zilliqa 2.0, will feature a new “Proof-of-Stake” (PoS) consensus mechanism, marking a significant shift for the protocol. 

This move is poised to deliver more efficient transaction processing, reduced energy consumption, and faster confirmation times for the network.

But what exactly is Proof-of-Stake, and why is it a game-changer for Zilliqa 2.0?

Blockchain Consensus Explained

At the core of every blockchain protocol is a consensus mechanism, a process that ensures all participants in the network agree on the state of the blockchain. 

This is crucial because blockchains are decentralised, meaning there isn’t a single central authority that decides the ordering of transactions. Instead, the network must collectively validate transactions and decide on the correct state of the distributed ledger.

Blockchains can use several types of consensus mechanisms, with the most well-known being Proof-of-Work (PoW) and Proof-of-Stake (PoS). 

Proof-of-Work is used by the Bitcoin blockchain and relies on miners solving complex mathematical puzzles to get the chance to propose a block of transactions, which consumes a lot of energy and computing power. The difficulty of the puzzles adjusts dynamically to ensure that new blocks are added to the blockchain at a consistent rate.

Proof-of-Stake, on the other hand, uses a different approach where validators “stake” their crypto to be selected as the proposer of the next block that extends and confirms the transaction history. This method is far less resource-heavy and more energy efficient, making it increasingly popular among newer blockchains.

Zilliqa’s current consensus mechanism combines PoW for selecting a validator set every epoch and practical byzantine fault tolerance (PBFT) for consensus. With the migration to Zilliqa 2.0, PBFT will be replaced with Pipelined Fast-HotStuff to enable shorter block times and faster finality.

The network will replace the Proof-of-Work validator selection with a Proof-of-Stake mechanism that is more energy efficient and offers users a way to earn rewards for securing the blockchain.

How Proof-of-Stake Works

In a PoS system, validators are chosen to propose and verify transactions based on the amount of cryptocurrency they hold and are willing to "stake" as collateral. 

This is akin to having a financial stake in the system. The more tokens a validator stakes, the higher their chances of being selected to propose the next block of transactions. 

The process is straightforward: validators are incentivised to act honestly because they can lose part or all of their staked tokens if they try to cheat the system. If a validator proposes a block or validates and votes for another validator’s proposal, they earn a reward, typically in the form of additional tokens. 

This method is more energy-efficient than PoW because it doesn’t require extensive computational work. Instead, it uses the economic investment of validators to secure the network, making it a greener and cheaper option.

Sustainable Rewards for Validators

Under Proof-of-Stake, validators are rewarded for their role in securing the network and ensuring its continued reliability.

Validators must lock up a significant amount of tokens, which make it extremely costly for an attacker to compromise the network. If a validator tries to propose or approve fraudulent blocks, they risk losing their staked tokens, which serves as a powerful deterrent against malicious behaviour.

While validators are required to lock up a minimum amount of tokens, users can also contribute to the security of the network by delegating their tokens to be staked by the validator on their behalf. This allows any user to participate in staking by delegating their stake through a validator and earning a proportional share of the rewards earned by that validator. These validators generally take a small commission fee on the rewards returned to delegators for staking their ZIL.

Through delegated staking, everyday token holders and end-users can contribute to the security of a Proof-of-Stake network and earn a share of the rewards.

The rewards allocated to validators are commonly called “staking rewards”, and they may come from transaction fees, newly minted tokens, or both. The key to ensuring a healthy network of validator nodes and token economy is a sustainable model for rewards, which is a key component of the tokenomics for Zilliqa 2.0.

By adjusting staking rewards based on network conditions, Zilliqa aims to maintain a balance between rewarding validators and reducing the inflation of the ZIL token. This is part of the broader overhaul of Zilliqa 2.0’s tokenomics, designed to support the network's growth and stability.

Proof-of-Stake is not just a buzzword - it’s a critical innovation in blockchain technology that enables faster, more efficient, and more sustainable networks. As we transition to Proof-of-Stake with Zilliqa 2.0, the network is set to become more robust and scalable, offering new opportunities for validators and users alike. 

Read more about how the Proof-of-Stake consensus works on Zilliqa 2.0 on the roadmap website.

In our next piece, we’ll dive deeper into how PoS will be implemented on Zilliqa 2.0 and what it means for current node operators. Stay tuned to our blog and socials!