Proof Of Stake Explained

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Proof Of Stake Explained

Proof Of Stake Explained

Summary

  • Proof of Stake (PoS) is a method to secure and validate transactions on a blockchain network.

  • PoS aims to reduce the environmental impact of PoW by replacing the computational power-based validation with a system based on participants’ ownership or stake in the cryptocurrency.

  • Proof of stake has participants, called validators, lock up a certain amount of cryptocurrency as collateral, known as staking. This shows their commitment to the network.

  • Proof of stake prevents 51% attacks by making them costly and unappealing for attackers.

Table of Contents

What is Proof of Stake?

Proof of Stake (PoS) is a method to secure and validate transactions on a blockchain network.

Instead of relying on energy-intensive processes like Proof of Work, PoS achieves consensus by having participants, known as validators, lock up a certain amount of cryptocurrency as collateral.

This collateral, or stake, allows them to validate transactions and propose new blocks to the blockchain.

History of PoS

The history of PoS dates back to the early days of blockchain technology.

In 2012, a developer known by the pseudonym Sunny King, introduced PoS with the launch of Peercoin, making it the first cryptocurrency to implement this consensus mechanism.

PoS aimed to reduce the environmental impact of PoW by replacing the computational power-based validation with a system based on participants’ ownership or stake in the cryptocurrency.

Peercoin’s PoS model gained attention for its potential to enhance sustainability and efficiency in blockchain networks.

Over time, other blockchain projects recognised the benefits of PoS and adopted mechanism variations.

On 15th September 2022, Ethereum, the second-largest cryptocurrency by market capitalisation, transitioned from PoW to PoS with the Ethereum 2.0 upgrade.

This shift aimed to improve scalability and energy efficiency while maintaining network security.

PoS continued to evolve, with innovations addressing potential vulnerabilities and improving its resilience against attacks.

In recent years, PoS has become a widely adopted consensus mechanism, with various blockchain projects leveraging its advantages.

How Does Proof of Stake Work?

Proof of stake has participants, called validators, lock up a certain amount of cryptocurrency as collateral, known as staking. This shows their commitment to the network.

Validators are then chosen randomly to propose and validate new blocks. The more cryptocurrency they have at stake, the higher their chance of being selected.

Validators check the validity of transactions and the data in a new block. They need to play by the rules, or they risk losing their staked coins.

If validators do their job correctly, they receive rewards in the form of transaction fees or newly created coins. However, if they act dishonestly, they can lose some or all of their staked coins as a penalty.

Proof of Stake Key Features

PoS differs from other methods in some fundamental ways, making it more energy-efficient and scalable.

Here’s how PoS differs from other consensus mechanisms:

1. Energy Efficiency

Unlike PoW, where computers solve complex puzzles requiring much energy, PoS doesn’t need heavy computations.

It selects validators to create new blocks based on the cryptocurrency they hold and are willing to “stake” or lock up as collateral.

This reduces the environmental impact significantly.

2. Staking for Security

In PoS, validators (nodes securing the network) need to “stake” their coins. This acts as collateral, aligning their interests with the network’s success.

If validators try to cheat, they risk losing their staked coins, making malicious actions costly and unappealing.

3. Randomness in Selection

PoS often uses random methods to select validators for block creation. This randomness makes it challenging for attackers to predict who will create the next block, adding a layer of security.

4. Checkpoints and Finality

Some PoS networks use checkpoints and finality, ensuring that once a block is confirmed, it can’t be changed.

This eliminates the risk of chain reorganisation, providing a secure and stable transaction history.

5. Slashing and Penalties

To discourage dishonest behaviour, PoS employs slashing and penalties. Validators who go against the rules may lose part of their stake or even face bans.

This creates a strong incentive for validators to follow the rules and maintain the network’s integrity.

Blockchain Networks That Use Proof of Stake

Numerous blockchain networks and cryptocurrencies embrace PoS or its variations.

Here are some notable ones below:

1. Ethereum 2.0 (ETH)

Ethereum, a prominent and sizable blockchain, is shifting from the energy-intensive PoW to the more eco-friendly PoS with Ethereum 2.0.

This upgrade seeks to enhance scalability and lessen environmental impact.

2. Cardano (ADA)

Cardano operates on a PoS consensus algorithm named Ouroboros. With a focus on sustainability, scalability, and interoperability, Cardano strives to advance blockchain technology.

3. Polkadot (DOT)

Polkadot utilises a PoS-derived consensus called Nominated Proof-of-Stake (NPoS). This mechanism empowers diverse blockchains to exchange messages and value without trust.

4. Tezos (XTZ)

Tezos, a self-improving blockchain, employs Liquid Proof-of-Stake (LPoS). Participants can delegate their tokens to validators, earning rewards in return.

5. Algorand (ALGO)

Algorand employs a PoS algorithm alongside a Byzantine Agreement algorithm for swift and secure transactions. Its goal is to achieve scalability while maintaining decentralisation.

6. Solana (SOL)

Solana, a high-performance blockchain, adopts a distinctive PoS consensus called Proof of History (PoH). This approach targets rapid and cost-effective transactions.

7. Avalanche (AVAX)

Avalanche relies on a PoS-based consensus known as Avalanche consensus. This design aims for superior throughput and decentralisation within the platform.

8. Cosmos (ATOM)

Cosmos, a network of interoperable blockchains, uses the PoS consensus algorithm Tendermint. It facilitates seamless communication and information sharing among different blockchains.

9. NEAR Protocol (NEAR)

NEAR Protocol, a sharded blockchain, employs PoS to achieve simplicity, scalability, and low transaction costs.

10. VeChain (VET)

VeChain, specialising in supply chain management, incorporates a PoS-based consensus involving economic nodes. This ensures efficiency and transparency in its operations.

Proof of Stake: Advantages

1. Energy Efficiency

PoS is more eco-friendly compared to traditional methods like PoW. It doesn’t involve energy-consuming computations, making it greener and reducing the environmental impact.

2. Reduced Entry Barriers

Anyone with cryptocurrency can participate. PoS doesn’t require hefty hardware, making it more accessible and inclusive.

3. Security Incentives

Validators are required to stake their coins. This ensures that validators have something to lose if they act dishonestly, creating a solid security incentive.

4. Faster Transactions

PoS enables quicker transaction confirmations. Validators are randomly selected, speeding up the process compared to PoW.

5. Scalability

PoS can handle more transactions. It efficiently processes transactions without the need for resource-intensive computations.

Proof of Stake: Drawbacks

1. Risk of Centralisation

PoS may lead to power concentration in the hands of a few. Wealthier participants have more influence, potentially reducing decentralisation.

2. Complexity and Regulations

PoS requires adherence to various regulations. Compliance with standards like PCI DSS, GDPR, and EMV involves paperwork, audits, and potential legal risks.

3. Training and Compatibility

Users and staff need training for PoS systems. It takes time, effort, and money to ensure proper usage, and system updates may require additional effort.

4. Staking Challenges

Staking involves risks. Validators can face penalties, and choosing how much to stake is a critical decision.

5. Dependency on Cryptocurrency Value

The success of PoS is linked to the value of the cryptocurrency. If the value drops significantly, validators may incur losses, impacting the network’s security.

Comparing Proof of Stake With Other Consensus Mechanisms

Proof of Stake

  • Validators secure the network by staking cryptocurrency as collateral. Validators are chosen based on the amount of cryptocurrency they hold.
  • Energy-efficient, scalable, and faster transaction confirmation compared to PoW. It prevents 51% attacks by making them costly and unappealing for attackers.

Proof of Work

  • Miners secure the network by solving complex mathematical problems. Miners compete, and the one solving the problem first adds a new block.
  • Energy-intensive, requiring specialised hardware. Vulnerable to 51% attacks, as seen in some well-known cryptocurrencies.

Delegated Proof of Stake

Delegates, elected by coin or token holders, verify transactions. Coin or token holders vote for preferred representatives. Top vote-getters become validators. Aims for more democracy, scalability, and performance compared to PoS.

Proof of Capacity

  • Miners use hard drive space for storing pre-computed solutions. More space increases the chances of mining rewards. Rewards for correct validation, penalties for dishonesty.
  • It is energy-efficient and uses available hard drive space instead of intensive computation.

Proof of Elapsed Time (PoET)

Validators run a trusted code that generates random wait times. The shortest wait time validator proposes a new block. Aims for energy efficiency without intensive computation—rewards for validators, potential for anyone with compatible hardware to join.

Overview of Proof of Stake Wallet

A PoS wallet is a particular type of cryptocurrency wallet that lets you take part in the Proof of Stake consensus method.

It ensures the security and validation of transactions on a blockchain.

In simple terms, it’s a tool that allows you to support the smooth operation of a blockchain network and earn rewards in return.

So, why would you need a PoS wallet?

Become a Validator

A PoS wallet is your gateway to becoming a validator on a PoS blockchain network. Validators are like the guardians of the network, proposing and voting on new blocks.

In return, they receive rewards. But here’s the catch – if a validator acts wrongly, they might lose some or all of their staked cryptocurrency.

Your PoS wallet is the key to this process, locking up your funds and letting you interact with the network protocol.

Choose Your Level of Involvement and Security

Different PoS wallets cater to other preferences. There are cold wallets, which are more secure but need more technical know-how.

These wallets store your private keys on offline hardware devices like USB drives. On the flip side, there are hot wallets, which are more user-friendly but somewhat less secure.

These are online wallets stored on software applications like mobile apps or web browsers.

Lastly, custodial wallets offer the easiest way to stake funds but at the cost of security, as they store your private keys on third-party services like exchanges.

Reap the Benefits of PoS Over PoW

PoS addresses the drawbacks of the original PoW consensus mechanism used by Bitcoin and Ethereum. PoS is more energy-efficient and scalable.

With a PoS wallet, you contribute to reducing the environmental impact associated with PoW.

Moreover, PoS enables quicker transaction confirmations and increased scalability, making the overall blockchain experience faster and more efficient.

Can Proof of Stake Prevent 51% Attacks?

Here’s how PoS works against 51% attacks:

1. Expensive Attack

To do a 51% attack, an attacker needs more than half of the network’s stake. Buying these coins is costly because it raises their price.

If caught, attackers lose their stake. The attack cost might be more than what they gain.

2. Tricky Attack

To attack, an entity needs over half the stake online all the time. This is hard with other honest validators also online and ready.

The network has safeguards like checkpoints, finality, and slashing. These deter attackers by making the attack more challenging.

3. Random Selection

Some PoS networks use randomness (like a lottery) to pick validators. Attackers can’t predict who’s next, making it harder to target or bribe them.

4. Checkpoints and Finality

PoS networks use checkpoints and finality. Checkpoints mark blocks as irreversible. Finality ensures once a block is done, it stays that way. This block attempts to rewrite the blockchain.

5. Slashing and Penalties

Slashing removes part of a validator’s stake and bans them. Penalties deduct fees from rewards. These harsh penalties make validators stick to the rules.

Conclusion

PoS stands out as a groundbreaking consensus mechanism, leveraging the amount of cryptocurrency staked to select and reward validators.

The proof of stake exhibits versatility by complementing other consensus mechanisms like DPoS, PoC, and PoET.

The rise of cashless and mobile payments goes well for PoS, with a projected surge to $4,650,556 million in mobile PoS payments and around 1,890.33 million users by 2025.

The trajectory of PoS aligns with technological advancements, including integration with platforms like Amazon’s Project Santos, challenging industry giants such as Shopify.

Forecasts predict substantial growth, with PoS systems projected to reach a market size of $125.9 billion by 2027.

As PoS revolutionises commerce and transforms the safeguarding and governance of digital assets, its future appears bright in the evolving landscape of decentralised technologies.

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