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Previous article I had article about What is Proof of work (PoW)? Anyone who does not know can review it. Today I will introduce to you the Proof of stake consensus mechanism. The system still uses encryption algorithm. But the goal of the mechanism compared to PoW is different. Not a long line, right away.
What is Proof of Stake?
Proof of Stake (PoS) is a consensus algorithm for the blockchain network. Decide who validates the next block. Instead of decoding cryptographic problems use computational power to verify transactions.
Proof of Stake was introduced in 2011. Peercoin is the first cryptocurrency to implement a comprehensive PoS consensus model. More scalable in terms of PoW consensus in Bitcoin, requires significant energy expenditure.
Proof of Stake (POS) was created as an alternative to Proof of Work (POW). Used to confirm transactions and add new blocks to the chain.
See also: What is Blockchain?
How Proof of Stake works
Proof-of-Stake reaches consensus by asking users to contribute some of their tokens for a chance to be selected to validate the transaction blocks and be rewarded for doing so.
In PoS, blocks are “forged” instead of being mined. The first factor to be considered in this selection process is the user’s stake.
Each person who wants to participate in the process must own a stake in the network. Staking involves locking a certain amount of money into the network as their shares. Use it as collateral to prove the block.
The more users place their bets, the higher their chances of being chosen. The number of stakes determines the chance that the node is chosen as the validator to forge the next block. The larger the stake, the greater the chance versus the less staking.
In PoS, the incentive to participate in validating reward blocks is a payment in the form of a transaction fee. As opposed to newly created currencies in PoW systems.
To avoid thinking this is an opportunity for rich nodes in the network. More and more unique methods are being added to the selection process. The key here is to include a degree of opportunity for the selection process to avoid the case where the richest user is always chosen to validate transactions, always reaping rewards and getting richer.
The two most commonly used methods are Random block selection and Coin age selection:
- Random block selection: Validators are selected by looking for the nodes with the lowest hash value combined with the largest stake.
- Coin age selection: Nodes are chosen based on the time that their tokens have been held as shares. Coin age is calculated by multiplying the number of days the coins are held as stakes by the number of those coins.
Evaluate the pros and cons of PoS
PoS is one of the best options for a cryptocurrency consensus algorithm.
- Energy: PoS algorithm saves energy – especially when compared to PoW.
- Security: To control the network and approve fraudulent transactions. A node must own a majority stake in the network, also known as a 51% attack. This would be impractical in order to gain control of the network. You need to own 51% of the money in circulation.
- Decentralization: If users on a PoS-based network invest twice as much as other users. They will have double control. Similar scenario on PoW would give users control exponentially.
- PoS is based on the stake associated with the hold. That means large token holders have better ROI and rich people get richer.
- Holders of large amounts of tokens threaten the network’s decentralized authentication process. Put more power in the hands of the rich validators.
Benefits for crypto owners
When you own cryptocurrencies you are not interested in becoming a validator. Also can be rewarded for joining the network’s ecosystem.
Various ways to generate revenue by stking are available today. The rules depend on the blockchain you are using. Be sure to learn more about each protocol before joining:
- Reward for holding: Users can earn rewards by only keeping their funds in their wallets for a certain amount of time. The reward action can be performed automatically by the protocol. Or the user action.
- Rewards for participation-authorization: User delegates a portion of his shares to validators. The reward will come from a validator who shares a portion of his revenue with those who trust their stake for him.
Cryptocurrencies use PoS
Ethereum, the premium smart contract platform. In the process of transitioning from PoW to PoS to supplement the performance needs of the network. Other networks, like Cosmos. A working blockchain network and one of the first full-blown PoS implementations to come into play.
Peercoin (PPC) uses a system that combines both methods. There are also Nxt (NXT), HyperStake, …
Proof of Stake popularity
PoS has increased the circulation rate significantly over the past few years among public blockchains looking to improve the underlying performance performance of Bitcoin. Such blockchains can support many transactions, and other applications have emerged to satisfy specific network needs.
PoS also gives validators and node operators a greater opportunity to enter into consensus. Entry and exit requires holding a specific amount of tokens. This is attracting users who do not want to spend the cost of expensive hardware to mine Bitcoin.
Overall, PoS has gained considerable momentum in the rapidly evolving cryptocurrency space.
Popularity of Proof of stake making it the new standard. Each algorithm will have its advantages and disadvantages, but for now, PoS is dominating the new block validation. PoS has broad support among many industry experts so sustainability is better. Everyone has their own rating for each mechanism.
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