Unlike PoW which controls the extraction of the next block solely at the expense of computing power (solving a computationally resource-intensive task – the first one with the correct result wins), PoS works with a real random algorithm. Let’s look at this consensus, and its improved versions. But first let’s look at what Proof of Stake is.
Proof of stake is a consensus mechanism in which the next participant is determined who is allowed to generate the next block in the block chain network. Compared to the Proof of Work process, it is more scalable, cheaper and consumes significantly less energy.
The “bet”, that is, the number of coins that the participant owns, is especially important. The share of this bet in the total amount of all coins in the system also affects the probability with which the participant is allowed to generate the next block.
In a simplified form, the procedure can be represented as a classic lottery. All the coins are in a big pot. The coin is pulled, and its owner is the validator (miner) of the next block. Thus, those with more coins have a better chance of becoming the next miner.
This principle is based on a fairly simple idea: someone who has something to lose (for example, the holder of a large number of coins) is not interested in deceiving other mining participants, since this discredits the entire system.
Also, the technology of staking, participation or commitment to the blockchain is used. When staking, the cryptocurrency is deposited and frozen for a certain period of time. Stakeholders are rewarded for this. Simply put, it can be considered as a percentage or a dividend for storing and depositing cryptocurrencies. The remuneration for staking is usually calculated as an annual percentage. However, in some cases it may be much larger, and in some cases it may be less. The amount varies, since each crypto project has its own. The reward for a block can be in the same cryptocurrency or in another.
Staking is used in a block chain to determine one or more participants who are allowed to add the next block to the block chain.
Those who delegate their tokens can participate in voting on certain blockchains and have the right to vote in the further development of the network and applications.
How Proof of Stake Works
The proof of stake is mainly based on nodes in the network. Transactions are sent to nodes to be combined into blocks and verified. The consensus mechanism then decides which node or nodes will choose transactions to validate.
Which nodes are determined may depend on various factors. Some blockchains have a limited number of validators elected by delegates. These delegates use their share to appoint a validator, and receive a block reward for this.
Mechanisms for recognizing harmful behavior and punishing it are often introduced. Some blockchains use a reputation model that punishes unreliable participants. The code defining how Proof of Stake works is often complex.
Compared to Proof of Work (POW), Proof of Stake leads to a significant reduction in energy consumption. In PoW, new blocks must be mined by checking or solving complex problems. As in the case of Bitcoin, this requires huge computing power, which leads to high energy consumption.
The days when you could mine BTC using an old graphics card that you no longer need are long gone. Anyone who wants to participate in mining today should not only pay for large electricity bills, but also be able to afford expensive specialized equipment.
Private miners compete with companies that are engaged in large-scale mining. Mining farms are often located in countries with low energy costs.
It is easier and cheaper to participate in the Proof of Stake blockchain. In many cases, it is enough to buy a cryptocurrency and delegate it. However, with some Proof of Stake blockchains, this is possible at a large cost. For example, with DASH, you will need 1000 DASH to operate the masternode. Other cryptocurrencies allow you to delegate to staking with small amounts.
Many crypto exchanges, such as Binance, offer their users the opportunity to stake through the platform, this has its difficulties. Mobile applications such as SpaceBot are more popular.
With Proof of Stake, the network is not at risk of being manipulated by several miners with the highest hash power.
In some blockchains, the stake size determines which participant will be selected to create a new block. If several players, such as founders or early investors, own very large shares, this can damage small shares.
In addition, large participants retain the majority of votes and, thus, control the development of the blockchain. This, in fact, contradicts the idea of decentralization, and the idea that the blockchain is supported by many small players.
One counterargument concerns what Proof of Work is accused of: high requirements for equipment. The equipment is designed to solve complex mathematical problems that require huge computing power. Since this does not apply to Proof of Stake, there are no obstacles for those who want to manipulate the network.
Bounded Proof of Stake (BPoS)
With Bonded Proof of Stake, the most famous form of PoS (Ethereum), all participants who want to participate in the next round of mining deposit any amount as a deposit. These crypto assets serve as security, and then are actually in the trustee’s account, and the system itself is the trustee.
If the amount has been deposited, the potential miner can no longer freely dispose of this loan. The participant is now determined from a group of potential miners, and the higher the probability of being selected, the more coins you invested initially. If a miner is found, it can generate the next block and publish it in the registry. If the majority of network participants accept a new block, the delegate receives a reward and his deposit back.
However, if the majority of participants reject the new block, the money used by the miner will not be refunded. The incentive to behave correctly when creating the next block is great, since sanctions are imposed for improper behavior.
Delegated Proof of Stake (SPoS)
Unlike BPoS, the owner of the coin receives the right to vote, the weighing of which is based on the number of coins stored (a procedure that is used, for example, on the EOS and Cosmos blockchain platforms). With this voting right, a validator is elected who can create a new block. So these should be particularly reliable participants.
From the totality of all validators, a subset of those who can receive remuneration for their work is now determined. If the validator behaves incorrectly, the network will vote against it. If he is reliable, he can count on regular income as a miner.
Another group in this process is the “delegates”. You cannot mine blocks, but you care about the management of the system, that is, about the organization and technical implementation of the corresponding ecosystem. Delegates do not make their own decisions, but make proposals for changes to the entire community, which, in turn, votes for changes.
Pure Proof of Stake (PPoS)
In fact, the Pure Proof of Stake process was invented by Silvio Micali (professor of computer science and artificial intelligence at the Massachusetts Institute of Technology). To this day, it is still relatively unknown, but very promising, and therefore worth considering.
The procedure of reaching consensus in PPoS consists of two stages. At the first stage, one coin is randomly selected from the system, which is also assigned to the wallet. The owner of this coin is by definition the miner of the next block. With a random determination, the miner’s public key, respectively, becomes known on the network.
The actual calculation of the next block, of course, happens very quickly, because you can completely abandon complex algorithms.
At the next, second stage, the system determines another 1000 coins. For performance reasons, this mechanism is allegedly determined not by a system or a central vote, but by a lottery that each coin owner conducts himself. If he is accepted, he receives a Winnig ticket, which serves as a confirmation on the network that he was indeed chosen by the algorithm.
Together with the Winnig ticket, the participant also spreads his opinion about the proposed miner block. If a majority is reached, the block is considered confirmed or rejected. Since there is practically no race condition between the two miners, a soft fork (two temporarily independent versions of the blockchain) and related problems are unlikely.
So what is the best approach in PoS?
Each blockchain consensus must simultaneously solve the following problems:
- Scalability (speed)
- Decentralization (distribution of power over the system)
Today, the Bitcoin and Ethereum ecosystem is in the hands of several mining pools. Here it is fair to talk about an oligopoly, if not a monopoly. Consequently, there is no real distribution of power between the two systems, since mining pools actually have the sole right to check blocks to their liking, change transactions, or even manipulate the entire chain afterwards. It’s a pity, but the oft-mentioned democracy doesn’t really exist in either of these two ecosystems.
However, with a neutral view , there are the following significant differences:
In DPoS, the number of witnesses and delegates is limited by the plan. This inevitably leads to centralization. Although it is much lower than, for example, currently with Bitcoin or Ethereum, it is still not fully decentralized.
It is also possible that some participants will unite to form interest groups in order to purposefully influence decisions.
This happens with BPoS, as the actual number of coins in the lottery process determines the probability of who will be the next miner. Of course, the one with fewer coins can also deposit a smaller amount to the escrow account. Thus, the concentration of production on a few “rich” participants is an almost inevitable consequence. So there is no real democracy at the moment, because the one who has a lot of coins can determine more than the one who has few.
In this aspect, PPOs actually behaves differently. Since both miners and validators are theoretically chosen purely randomly, concentration using this method on several mining pools is statistically practically impossible.
Another difference is the handling of chain forks and, as a result, “nothing is at stake.” Since a fork is almost impossible with PPOs, the ecosystem does not need to deal with this problem.