Understanding Proof of Stake
Proof of Stake
In this writing I am attempting to understand the concept of “Proof of Stake” and the way it works when discussing cryptocurrencies in general. I have learned a lot about consensus mechanisms over the past 15 months and they all have advantages and disadvantages. I am going to attempt at touching on these issues in the coming paragraphs. According to Bitcoin-wiki the first time proof of stake was suggested was in a Bitcoin forum In July 2011. (See following link https://bitcointalk.org/index.php?topic=27787.0) There are a couple of different versions of Proof of Stake (POS). On top of POS there is also “Delegated Proof of Stake” (DPOS). I will touch on both in this writing. Anyways buckle up because we are going on a magic carpet ride through the wonderful world of POS!
What is Proof of Stake? (In cryptocurrency)
Proof of Stake is an algorithm created to validate transactions or achieve consensus. People or “validators” lock up a certain amount of coins or “stake” the coins and these coins are used for transactions. These coins are specifically for filling transaction quickly. In fact one of the reasons proof of stake is so popular is the speed of transactions. POS uses validators (validators are the “miners” of the POS system). Validators are people that lock up their coins in a “stake” which is like an escrow account. These people that stake their coins get to vote on block creation (called forging instead of mining) with those holding bigger bags getting a bigger influence than someone with a minimal stake. The way I think about it is people put their coins into a stake which put their coins to work for them. These coins are used to complete transactions. Let’s say I decide I want to send my friend Ernie some Peercoin. When I send 100 coins, they get sent to a validator that then sends their (already verified) funds to Ernie and then they get my 100 Peercoin + a transaction fee, which is distributed to the validator that staked their coins. This system is utilized by quite a few cryptocurrencies and believers like to point out that POS is much more energy efficient than Proof of Work, which is accurate.
Proof of Stake has a few different variations that are implemented across the crypto-space. The typical model is one where anyone can stake coins and those coins are used to then validate transactions. But there are a couple of other models that use a similar model to POS but instead of anyone being able to validate transactions, there is a group of representatives or validators that approve transactions. Coins like Tron utilize this model which is referred to as “DPOS” or “Delegated Proof of Stake”. In the case of Tron, there are 27 validators or “super representatives” that are ultimately responsible for approving all transactions on the Tron chain. These super representatives are voted in by the community and can also be voted out by the community if they believe the representative is malicious or has bad intent.
In the crypto-space there is a lot of debate over consensus mechanisms. Which one is better? Well lets look at a few advantages to POS. Proof of Stake often receives accolades for being more energy efficient than mining cryptocurrency like Bitcoin. That is accurate and nobody can deny the fact that Bitcoin mining does use a lot of electricity. Proof of stake eliminates the entire mining process and therefore is more energy efficient by design. Another advantage is POS coins have fast transaction times (most of the coins do) because of the way transactions occur. Bitcoin can only process 7 transactions per second while a DPOS (Delegated proof of Stake like Tron) coin, EOS, can handle around 3000 transactions per second. The speed of transactions is significantly greater with POS coins for the most part. Proof of stake also gives people an opportunity to let their coins work for them instead of simply sitting in a wallet somewhere not earning you anything. I like to think of it as a loan. You receive interest (staking rewards) for loaning (staking) your coins. Proof of Stake has many advantages and that is one reason so many coins use the consensus mechanism. The whole system is much easier to grasp than Bitcoin mining.
A coin that uses POS typically does not utilize coin mining or “coin creation”. The coins amount is fixed (in most cases). So unlike Bitcoin where coins are released every 10 minutes (average) POS coins typically have all the coins on the table when the currency is created. When you look at POW coins many are vulnerable to what people refer to as 51% attacks. With POS coins things are different than with coins like BTC. In order to attack a POS coin the validators must collude and then approve bad transactions. But the community could theoretically limit the malicious act by voting the cheating validators off their post. The community can implement a fork that will get rid of the bad transactions. The cost to attack Proof of Work coins is so much less than attacking a POS coin (most of the time). The cost of attacking most POS coins is so high that it is a natural deterrent to would be attackers. POW coins have varying difficulties when you talk about 51% attacks and so do POS coins. Now there are other issues with POS coins I will touch on a bit here. Such as the “nothing at stake problem” which occurs when a coin forks and the validator receives coins on the forked chain as well as retaining coins on the old chain. Which means the validator can potentially get two times the transaction fees if they do this. There is a solution for this problem that is new and supposed to end the issue. It will be implemented into ETH when it finally switches from POW to POS/POW hybrid. ETH will require a deposit that will be locked up for an extended period and will discourage people from attempting a “nothing at stake” attack due to the potential loss of their deposit. Proof of stake is still being tested daily to shore up any weak points. POW is far more tested and proven, but POS is getting there too, with projects like Cardano and NEO etcetera.. leading the way.
Proof of Stake is an interesting way to approve transactions and is more energy efficient that mining due to the fact that you do not need expensive mining equipment to participate. Proof of Stake has a long way to go to ensure it is secure, but staking has been working for many coins such as NEO and Reddcoin among many others. The concept is pretty simple. You put your coins up for staking and that means they are typically locked into the staking for a certain period of time (varies) When a transaction takes place the stake is what is used to complete the transaction, and the original amount sent + a transaction fee gets deposited into the stake holders’ wallet. The bigger the stake you own the more likely that you will be chosen vs someone with a smaller stake. It is easier to grasp exactly how POS works vs POW if you ask me, but that doesn’t mean POS is better. It simply means it is easier to understand. POW is very complex. This concludes my attempt to understand POS better. I hope you enjoyed reading this as much as I enjoyed writing it!
Written by: Tim Pace 2/11/2019