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What is Proof of Stake (POS)

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Table of Contents

Introduction

Proof of Stake(POS) was introduced in 2011 on the Bitcointalk forum as a solution to the problems facing the most popular consensus algorithm, Proof- of- Work. In 2012, Peercoin became the first digital currency to use this consensus algorithm.

While both Proof-of-Stake and Proof-of-Work share the same goal of reaching consensus in the blockchain process, both reach their goal in distinct ways.

So, What is proof of stake?

Proof of Stake(POS) is a consensus algorithm where nodes/validators who validate blocks are chosen depending on the number of coins they are staking. The more coins a validator stakes, the more likely that person will be selected to produce new blocks. So, the more power that validator has in the system.

Proof of Stake Vs. Proof of Work

As stated above, Proof-of-Stake was created to address the challenges that face the Proof of Work consensus mechanism. So, if you want to clearly understand POS, you need to understand how POW works and what are some of its challenges.

Understanding Proof-of-Work (POW)

In Proof-of-Work, a node/miner validates transactions that are collected into blocks, which are networked together to form a blockchain. The miner or node is an administrative body of the blockchain responsible for authenticating the legitimacy of the transaction in each block.

For a node to carry out the verification process, they have to solve a computation problem, usually known as the “proof of work problem.” The first node/ miner to solve the problem gets rewarded with coins. Once the transaction is verified, it’s added to the blockchain, a public ledger in a decentralized network.

The mining process requires the use of a lot of computing power to solve computation problems. Unlike the old days where you could easily solve a cryptographic puzzle with your laptop CPU and mine coins, today you require specialized computers.

This is because of an increased number of miners trying to solve cryptographic puzzles. This makes the puzzles more complicated and hard to solve with less powerful computers. You need powerful computers that can run and solve these complicated challenges.

Higher computing power means a high amount of electricity and power. In 2015 alone, one Bitcoin mining required electricity enough to power 1.57 American households a day.

However, most mining is done in low-cost areas and uses renewable power sources like hydropower. Using hydroelectricity for cryptocurrency mining is a great way to use excess power and fund renewable energy.

Understanding Proof-of-Stake (POS)

POS consensus algorithm comes in to address this challenge by assigning mining power according to the number of coins a miner has. So, instead of using a high amount of energy to solve the POW cryptographic puzzles, a POS validator is limited to mining a percentage of transactions representing his or her ownership stake. For example, a miner with only 10% of the coin can mine only 10% of the Blocks.

In POS, instead of miners, we have validators or forgers. Not every validator gets the chance to mine the coin; they are selected based on a semi-random, two-part process. The first factor for consideration is how much token/ coins you’re willing to stake.

Every validator must own a stake in the network. Staking here involves depositing coins into a system, locking it in a virtual safe, and utilizing it as a security to vouch for a block: the higher your stake, the higher your chances to be picked.

However, if you perform any malicious activity like approving an invalidated transaction, the network will take all your stakes as punishments. So, you stand to lose more than someone who has staked a less amount. Payout in POS is in the form of transaction fees, rather than block rewards in PoW systems.

I know this doesn’t seem so much as a random selection process, and perhaps it can be abused by the whales. But the Key to a Proof of Stake system is to induce a selection process. Therefore no rich users can always be selected to validate transactions-consistently earning the Proof of Stake coins as rewards and continue to grow richer.

The second factor that is often considered is the validator coin’s age. This method selects a validator based on how long they have staked their tokens. Coin Age is calculated as the value of multiplication between the number of coins stacked and the days they have staked the coins.

When a validator/ forger approves a transaction and places it into a block, the Coin Age resets back to zero, and they must wait for some time to be able to validate another transaction- this prevents the rich from dominating the blockchain network.

Advantage of Proof-of-Stake (POS)

Delegated Proof of Stake (DPOS)

The Delegated Proof of stake (DPoS) is a consensus mechanism developed to tackle the issues of scalability faced by Public blockchains. DPoS seeks to boost up the speed of transactions and block creation, whereas not compromising the decentralized incentive arrangement of the blockchain.

In Proof of Stake consensus algorithm, a validator needs to put his/her coins at stake, therefore securing the right to validate transactions, generate blocks, and earn transaction fees. DPoS, an alternative of the POS model, seeks to reach consensus more effectively.

It’s more like a democratic version of the POS consensus mechanism because it includes a voting system. Stakeholders vote in real-time for delegates and witnesses.

The witnesses are responsible for validating transactions, generating blocks, and adding them to the blockchain. In return, they are awarded the associated fees/salary. And just like in any democracy, they have to maintain a solid reputation to retain their popularity across Stakeholders.

Delegates, on the other hand, oversee the governance and performance of the entire blockchain network. Since voting is a continuous process, stakeholders can vote out any delegate or witness who lost his or her credibility. This is because they are all selected based on the best interest of the network.

According to Dan Larimer, this energy-efficient model can manage a higher transaction volume and provide a much faster confirmation time, as compared to POW and POS models.

Conclusion

Proof of Work is still the most popular and trusted consensus mechanism, but it’s often criticized because of its dependence on high amounts of electricity.

In Proof of Stake consensus, validators don’t require high computing power for mining. Instead, they depend on their stake. The bigger the stake the validators own, the higher the chance of mining a block.

DPoS is the next stage in the evolution of consensus algorithms. It builds on the POS model and significantly boosts speed and scalability. However, Proof of Stake and Delegated Proof of Stake are not without challenges.

References

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Amna Eltawil

Amna Eltawil

Amna Eltawil is an Egyptian journalist. Through her years of journalism, she has worked for top publications and organizations like John Maxwell organization, the International Herald Tribune, and Al Wafd.

She also worked for the largest media network in the middle east: MBC on a full-time basis.

When she is not working, Amna can probably be found in bed with a book cuddling with her beloved Siberian Husky.

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