Proof of Stake (PoS) Guide
There are 3 types of distributed consensus protocol or algorithm for cryptocurrencies and blockchains:
1. Proof of Work (PoW)
2. Proof of Stake (PoS)
3. Delegated Proof of Stake (DPoS)
This article will explain what is Proof of Stake (PoS) and how it works.
Prominent cryptocurrencies using Proof of Stake (PoS):
Proof of Stake (PoS) is a consensus protocol used by various cryptocurrencies and blockchains to attain distributed consensus. The procotol was first introduced in 2011 and Peercoin was the first cryptocurrency to implement it in 2012. Combinations of random criteria for example age, wealth referred to as the “stake” determines who will be the creator of the next block. The advantages of using PoS instead of PoW are better network security and energy efficiency.
Proof of Stake Mining
There is no block limit that a Proof of Work (PoW) based miner can mine, but a Proof of Stake (PoS) miner can only mine a percentage of transactions in proportion to the percentage of the coins ownership stake that he/she owns. For example, if John owns 45% of coins, Jack owns 20%, Jim owns 35% and Bob owns 10% of all coins in the blockchain, John will have a 45% chance of being chosen to be the one that validates the block, Jack with 20% chance, Jim 35% and Bob 10% respectively. This randomization prevents centralization, if not the owner with the most coins will always be creating the next block and get richer.
PoW vs PoS
Proof of Work (PoW) system uses tremendous amount of energy to mine new blocks. It was reported that every PoW based Bitcoin transaction consumes as much electricity as a Dutch household consume in two weeks on average and is denounced by critics as unsustainable, ineffective and a threat to climate change. In contrast, PoS uses a lot less energy, since the chance of mining a POS block is determined by wealth not hardware, energy and computing power, hence, PoS is more cost effective with lesser needs to release new coins for incentivizing miners to maintain the network. This helps a lot to keep the coin price stable. On the other hand, PoW miners will usually need to sell their hard earned new coins to cover their expensive electricity mining expenses and this will have some pulling down effect to the coin price.
Proof of Work (PoW) Security
Now on blockchain security, Bitcoin uses Proof of Work (PoW) algorithm and has a coin supply cap of 21 million coins. When the supply cap max out, miners will no longer get new coin rewards for mining new blocks and will only earn transaction fees. With transaction fees expected to diminish over time as blockchain technologies improve along with speed of transactions, users will opt for lower transactions fees, there will be lesser rewards for mining, hence, fewer miners. When a PoW based mining pool or miners achieved 51% of majority computational power of the network, they gain the power to invalidate transactions of other users and create fraudulent blocks to their advantages. This attack is named “51% attack” and is easier to achieve with fewer miners to compete for computational power.
Proof of Stake (PoS) Security
In a PoS network, the malicious attacker will need to acquire 51% of the cryptocurrency coins to be able to execute a 51% attack. This PoS design makes it extremely disadvantageous and costly to attack the network for the malicious attacker who spent a fortune to acquire a majority 51% coin stake, since the attack will probably crush his investments as well and cause him/her to lose millions or even billions of dollars depending on the size of the cryptocurrency market. It makes no sense for a majority owner to attack his/her own network since he/she will probably gain more by ensuring that the network is stable and flourishing.
Downside of PoS
The downside of PoS is the “nothing at stake” problem, which occurs in the event of a consensus failure
because generators of blocks having nothing to lose, support varying blockchain histories and prevent the
conflict from being resolved. Fortunately, this did not stopped the community from improving the system and
launched a new protocol, called the Delegated Proof of Stake (DPoS) which will be covered in the next article.