What is Proof of stake ?

Aug 28, 2022

Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchain—so the consensus mechanism secures the blockchain.

Learn more about proof-of-stake and how it is different from proof-of-work. Additionally, find out the issues proof-of-stake is attempting to address within the cryptocurrency industry.

KEY TAKEAWAYS

  • With proof-of-stake (POS), cryptocurrency owners validate block transactions based on the number of coins a validator stakes.
  • Proof-of-stake (POS) was created as an alternative to Proof-of-work (POW), the original consensus mechanism used to validate a blockchain and add new blocks.
  • While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms require validators to simply hold and stake tokens.
  • Proof-of-stake (POS) is seen as less risky in terms of the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous.
  • The next block writer on the blockchain is selected at random, with higher odds being assigned to nodes with larger stake positions.

Before proof of stake, the most popular way to achieve distributed consensus was through Proof-of-Work (implemented in Bitcoin). But Proof-of-Work is quite energy(electrical energy in mining a bitcoin) intensive. So, a proof-of-work based consensus mechanism increases an entity’s chances of mining a new block if it has more computation resources. Apart from the upper two points, there are other weaknesses of a PoW based consensus mechanism which we will discuss later on. In such a scenario, a Proof-of-Stake based mechanism holds merit.

A typical PoS based mechanism workflow:

  • Nodes make transactions. The PoS algorithm puts all these transactions in a pool.
  • All the nodes contending to become validator for the next block raise a stake. This stake is combined with other factors like ‘coin-age’ or ‘randomized block selection’ to select the validator.
  • The validator verifies all the transactions and publishes the block. His stake still remains locked and the forging reward is also not granted yet. This is so that the nodes on the network can ‘OK’ the new block.
  • If the block is ‘OK’-ed, the validator gets the stake back and the reward too. If the algorithm is using a coin-age based mechanism to select validators, the validator for the current block’s has its coin-age reset to 0. This puts him in a low-priority for the next validator election.
  • If the block is not verified by other nodes on the network, the validator loses its stake and is marked as ‘bad’ by the algorithm. The process again starts from step 1 to forge the new block.

Features:

  • Fixed coins in existence:
    There is only a finite number of coins that always circulate in the network. There is no existence of bringing new coins into existence(as in by mining in case of bitcoin and other PoW based systems). Note that the network starts with a finite number of coins or ‘initially starts with PoW, then shifts to PoS’ in some cases. This initiation with PoW is meant to bring coins/cryptocurrency in the network.
  • Transaction fee as reward to minters/forgers:
    Every transaction is charged some amount of fee. This is accumulated and given to the entity who forges the new block. Note that if the forged block is found fraudulent, the transaction fee is not rewarded. Moreover, the stake of the validator is also lost(which is also known as slashing).
  • Impracticality of the 51% attack:
    To conduct a 51% attack, the attacker will have to own 51% of the total cryptocurrency in the network which is quite expensive. This deems doing the attack too tedious, expensive and not so profitable. There will occur problems when amassing such a share of total cryptocurrency as there might not be so much currency to buy, also that buying more and more coins/value will become more expensive. Also validating wrong transactions will cause the validator to lose its stake, thereby being reward-negative.

Advantages of PoS:

  • Energy-efficient:
    As all the nodes are not competing against each other to attach a new block to the blockchain, energy is saved. Also, no problem has to be solved( as in case of Proof-of-Work system) thus saving the energy.
  • Decentralization:
    In blockchains like Bitcoin(Proof of Work system to achieve distributed consensus), an extra incentive of exponential rewards are in place to join a mining pool leading to a more centralized nature of blockchain. In the case of a Proof-of-Stake based system(like Peercoin), rewards are proportional(linear) to the amount of stake. So, it provides absolutely no extra edge to join a mining pool; thus promoting decentralization.
  • Security:
    A person attempting to attack a network will have to own 51% of the stakes(pretty expensive). This leads to a secure network.

Weakness of a PoS mechanism:

  • Large stake validators:
    If a group of validator candidates combine and own a significant share of total cryptocurrency, they will have more chances of becoming validators. Increased chances lead to increased selections, which lead to more and more forging reward earning, which lead to owning a huge currency share. This can cause the network to become centralized over time.
  • New technology:
    PoS is still relatively new. Research is ongoing to find flaws, fix them and making it viable for a live network with actual currency transactions.
  • The ‘Nothing at Stake’ problem:
    This problem describes the little to no disadvantage to the nodes in case they support multiple blockchains in the event of a blockchain split(blockchain forking). In the worst-case scenario, every fork will lead to multiple blockchains and validators will work and the nodes in the network will never achieve consensus.

Blockchains using Proof-of-Stake:

  • Ethereum(Casper update)
  • Peercoin
  • Nxt

Variants of Proof-of-Stake:

  • Regular Proof-of-Stake – The one discussed in this article.
  • Delegated Proof-of-Stake
  • Leased Proof-of-Stake
  • Masternode Proof-of-Stake

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