What is a Proof of Stake (POS)?
What is a Proof-of-Stake (POS)?
The proof-of-stake consensus algorithm was already discussed at the Bitcointalk forum in 2011 in order to solve the problems of the currently most popular algorithm, the proof-of-works. While they both have the same goal of reaching consensus on the blockchain, the process of achieving the goal is very different.
How does it work?
The proof-of-stake algorithm uses a random selection process to select a node as a validator for the next block. This is done based on a combination of factors, which can include staking age, chance and the knot’s fortune.
It can be noted that in proof-of-stake systems, blocks are “forced” rather than mined. Proof-of-stake cryptocurrencies often start selling pre-mine coins. Alternatively, you can also start with the proof-of-work algorithm and switch to the proof-of-stake later.
While proof-of-work based systems create cryptocurrencies to reward miners, the proof-of-stake system typically uses transaction fees as a reward.
Users who want to participate in the forging process are obliged to block a certain number of their coins as their use in the network. The size of the stake determines the chances that a node will be selected as the next validator to advance the next block – the larger the stake, the greater the chance. To ensure that the process not only favors the richest nodes in the network, additional unique methods are added to the selection process. The two most commonly used methods are “random block selection” and “coin selection by age”.
With random block selection, the validators are selected by searching for nodes with a combination of the lowest hash value and the highest bet, and since the size of the bets is public, the next validator can usually be predicted by other nodes.
Coin selection by age selects nodes based on how long their tokens have been locked. The coin age is calculated by multiplying the number of days the coins are held as a bet by the number of coins that are bet. As soon as a node has forced a block, its coin age is reset to zero and it has to wait a certain time to forge another block – this prevents nodes with a large stake from dominating the blockchain.
Each cryptocurrency that uses the proof-of-stake algorithm has its own rules and methods that it believes are the best possible combination for them and their users.
When a node is selected to advance to the next block, it checks whether the transactions in the block are valid, signs the block, and adds it to the blockchain. As a reward, the node receives the transaction fees associated with the transactions in the block.
If a node wants to stop being a Forger, its stake will be released along with the rewards earned after a certain period of time, giving the network time to check that there are no dishonest blocks that the node has added to the blockchain.
The use serves as a financial motivator for the Forger node in order to neither create nor validate fraudulent transactions. If the network detects a fraudulent transaction, the Forger node loses part of its use and the right to participate as a Forger in the future. As long as the stake is higher than the reward, the validator would lose more coins than he would win if he tried to defraud.
To effectively control the network and approve fraudulent transactions, a node would need to have a majority stake in the network, also known as a 51% attack. Depending on the value of a cryptocurrency, this would be very impractical, as it would require 51% of the circulating supply to be in control of the network.
The main advantages of the proof-of-stake algorithm are energy efficiency and security.
A large number of users are advised to operate nodes because it is simple and inexpensive. This and the random process also make the network more decentralized, since no mining pools are required to extract the blocks. And since there is less need to create new coins to reward Forger, it helps to keep the price of a particular coin more stable.
It’s good to remember that the cryptocurrency industry is rapidly changing and evolving, and that there are several other algorithms and methods that are being developed and tried out.