This article intends to clarify the workings of the Proof of Stake algorithm, its origins, and how it differs from the Proof of Work.
Exploring Proof of Stake
On August 4, 2020, the Ethereum team initiated the Medalla test network, a crucial step towards transitioning the platform to the Proof of Stake or PoS algorithm.
Exploring Proof of Stake
Contrasting with centralised systems where a sole authority makes decisions, distributed systems leverage numerous independent authorities and nodes that collaboratively sustain the system. Consensus algorithms are the means by which nodes in distributed networks reconcile their data records. This includes validating legitimate transactions.
The Proof of Stake (PoS) is an example of such an algorithm. It primarily involves specific nodes checking the validity of transactions. The selection of these validators is based on various factors such as the number of coins in their wallet (stake), the stake's age, and an element of randomness.
The verification of a new block occurs as follows:
The validator makes a bid by blocking a certain amount of coins in the wallet, with a system-imposed minimum threshold usually applying.
When a new block needs to be generated, the system chooses the validator who made the bid and is online. The choice of validator can either be random (PoS) or timed (DPoS).
When a new block needs to be generated, the system chooses the validator who made the bid and is online. The choice of validator can either be random (PoS) or timed (DPoS).
The validator confirms the block, appends it to the chain, and receives a reward. This process of forming a new block is known as forging.
Should the validator be found guilty of fraudulent activities like double spending, their bid is forfeited to the system.
Rewards don't originate from newly minted coins as in PoW (for example, in the Bitcoin network), but from the aggregate fees that participants paid to validate their transactions. The reward size is influenced by the specific PoS mechanism, the cryptocurrency, and other elements. This method of validators earning coins is known as staking.
Origins of Proof of Stake
• Faster and more specific transaction confirmations. Eliminates the need to purchase potentially confiscatable mining equipment (given the semi-legal status of cryptocurrencies at the time).
• A more dependable system of “voting rights” formed organically from the bottom up, rather than arbitrarily and/or centrally.
• PoS would confer “voting rights” to all participants by entrusting their coins (i.e., votes) to reliable delegate nodes.
QuantumMechanic's idea was well-received by the Bitcointalk community, leading to its further development. Over time, Proof of Stake started displaying other advantages like lessened power consumption and additional benefits for blockchain networks where all coins are already generated.
The first practical application of PoS happened in 2012 with the Peercoin blockchain, which used a hybrid PoW/PoS algorithm. Here, PoW was used for coin issuance, while PoS was employed for transaction validation. This consensus model is elaborated in Sunny King and Scott Nadal’s work PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake.
In 2014, Daniel Lumiere further enhanced the algorithm by introducing the Delegated Proof of Stake (DPoS) mechanism. Initially implemented in the Bitshares network, it was so efficient that it gradually found adoption in other cryptocurrencies. Lumiere later created the Steem and EOS blockchains that also employ DPoS.
At present, numerous versions of the PoS algorithm exist. Among the most popular is Delegated Proof of Stake (DPoS), where network users delegate their coins to other participants, or master nodes, thereby voting for validators and receiving a portion of their profits. The earnings of a voter usually rely on their contribution to the total votes of master nodes - the larger the contribution, the higher the returns.
Other notable variations of the PoS algorithm include:
• Leased PoS (LPoS): Participants can rent their tokens to others. These leased coins enhance the node's value, boosting its chances of generating a new block and receiving a reward. The leasing node shares its rewards with the lessor nodes.
• Proof of Importance (PoI): The mechanism considers factors like the number of coins in the account, the time the validator node is online, and its activity, i.e., the number of recent transactions when selecting validators.
• Casper: A hybrid Ethereum algorithm that transitions the network from PoW to PoS with minor changes. For instance, if the validator supports an empty fork chain of the blockchain, they will not only lose their stake but also an amount double the transaction cost.
• Proof of Stake Velocity (PoSV): This consensus mechanism of the Reddcoin blockchain bases the validator's reward not only on the proportion of coin ownership but also on the work speed.
The concept of Proof of Stake (PoS) first surfaced on bitcointalk.org forum in 2011 when a user named "QuantumMechanic" proposed Proof of Stake as an alternative to Proof of Work. QuantumMechanic posited that transaction validation should be weighted by the quantity of bitcoins owned, not by the computational resources contributed to the network. According to him, this offered several benefits:
• Faster and more specific transaction confirmations. Eliminates the need to purchase potentially confiscatable mining equipment (given the semi-legal status of cryptocurrencies at the time).
• A more dependable system of “voting rights” formed organically from the bottom up, rather than arbitrarily and/or centrally.
• PoS would confer “voting rights” to all participants by entrusting their coins (i.e., votes) to reliable delegate nodes.
QuantumMechanic's idea was well-received by the Bitcointalk community, leading to its further development. Over time, Proof of Stake started displaying other advantages like lessened power consumption and additional benefits for blockchain networks where all coins are already generated.
The first practical application of PoS happened in 2012 with the Peercoin blockchain, which used a hybrid PoW/PoS algorithm. Here, PoW was used for coin issuance, while PoS was employed for transaction validation. This consensus model is elaborated in Sunny King and Scott Nadal’s work PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake.
In 2014, Daniel Lumiere further enhanced the algorithm by introducing the Delegated Proof of Stake (DPoS) mechanism. Initially implemented in the Bitshares network, it was so efficient that it gradually found adoption in other cryptocurrencies. Lumiere later created the Steem and EOS blockchains that also employ DPoS.
At present, numerous versions of the PoS algorithm exist. Among the most popular is Delegated Proof of Stake (DPoS), where network users delegate their coins to other participants, or master nodes, thereby voting for validators and receiving a portion of their profits. The earnings of a voter usually rely on their contribution to the total votes of master nodes - the larger the contribution, the higher the returns.
Other notable variations of the PoS algorithm include:
• Leased PoS (LPoS): Participants can rent their tokens to others. These leased coins enhance the node's value, boosting its chances of generating a new block and receiving a reward. The leasing node shares its rewards with the lessor nodes.
Delegated Byzantine Fault Tolerance (DBFT): In this method, coin holders select the 'guardians' responsible for creating new blocks and reaching consensus, using Byzantine Fault Tolerance protocols.
• Proof of Importance (PoI): The mechanism considers factors like the number of coins in the account, the time the validator node is online, and its activity, i.e., the number of recent transactions when selecting validators.
• Casper: A hybrid Ethereum algorithm that transitions the network from PoW to PoS with minor changes. For instance, if the validator supports an empty fork chain of the blockchain, they will not only lose their stake but also an amount double the transaction cost.
• Proof of Stake Velocity (PoSV): This consensus mechanism of the Reddcoin blockchain bases the validator's reward not only on the proportion of coin ownership but also on the work speed.
Proof of Stake (PoS) vs Proof of Work (PoW)
Conclusion
Proof of Stake (PoS)
Validators are chosen based on their coin stake, stake age, and participant activity.
There is no reward per block. Validators only receive a transaction fee. In DPoS and LPoS, validators share the rewards with those who backed them with coins (votes).
PoS is highly cost-effective for investors since there is no need to invest in high-powered computing devices such as ASICs.
Proof of Work (PoW)
Mining involves solving complex calculations using powerful computing devices.
New blocks come with rewards in the form of new coins given to the first miner who solves a complex mathematical problem. Transaction verification also rewards miners with fees.
PoW only proves profitable with significant investments that allow a competitive edge over other miners, and this is only viable when the mined coin's rate is high.
Conclusion
Despite some downsides, the Proof of Stake (PoS) algorithm has demonstrated its superiority over Proof of Work (PoW) in terms of ease of mining and energy efficiency. Consequently, interest in PoS is expected to surge. However, for PoS to become the dominant trend, it needs to prove its efficacy in a large, well-established project like Ethereum 2.0. Users are eagerly anticipating the results of Medalla testing and Ethereum's transition to PoS.