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  • Writer's pictureLawrence Cummins

What is Proof of Stake (PoS)

Updated: Aug 25, 2023

Proof of Stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their stake in the associated cryptocurrency. This approach addresses the limitations and concerns of the traditional Proof of Work (PoW) algorithm, which is currently used by most popular cryptocurrencies.

In a blockchain, transactions must be appended to the chain to be recognized. Validators are responsible for appending these transactions and are typically rewarded for their efforts. However, to ensure the security of the blockchain, there needs to be a mechanism in place to prevent malicious users or groups from taking control of most of the validation process. PoS accomplishes this by requiring validators to have a stake in the blockchain's tokens, making it more difficult for potential attackers to acquire a significant fraction of the tokens for an attack.

PoS allows individuals to mine or validate block transactions based on the number of coins they hold. The more coins a miner owns, the more mining power they have. This is in contrast to PoW, where mining power is based on computational work performed by miners. PoS and PoW aim to reach consensus in the blockchain, but the processes to achieve this goal differ significantly.

In a PoS system, when a transaction is initiated, the transaction data is fitted into a block and duplicated across multiple nodes on the network. These nodes, which serve as the administrative body of the blockchain, verify the legitimacy of the transactions in each block. The PoS algorithm uses a pseudo-random election process to select a validator for the next block, considering factors such as stake age, randomization, and wealth.

There are different methods used for the selection process in PoS systems. The Randomized Block Selection method chooses validators based on their combination of the lowest hash value and the highest stake. This allows other nodes to predict the next validator based on these publicly available stake sizes. The Coin Age Selection method, on the other hand, selects validators based on how long their tokens have been staked. This prevents large stakeholders from dominating the blockchain, as their coin age is reset to zero after forging a block.

Once a node is chosen to forge the next block, it verifies the transactions, signs the block, and adds it to the blockchain. The node receives the transaction fees associated with the block's transactions as a reward for their work. If a node no longer wants to be a validator, its stake and the earned rewards are released after a certain period. This allows the network to verify that the node added no fraudulent blocks.

The security of PoS lies in the financial motivation for validators not to validate or create fraudulent transactions. If fraudulent activity is detected, the validator loses a portion of their stake and their right to participate as a validator in the future. To effectively control the network and approve fraudulent transactions, an attacker must own a majority stake in the network, known as a 51% attack. However, acquiring such a large stake would be impractical and expensive.

One of the main advantages of PoS is its energy efficiency compared to PoW. PoW algorithms require significant computing power and electricity, leading to high energy consumption. PoS, on the other hand, eliminates the need for extensive computational work and reduces energy consumption. This encourages more users to run nodes, leading to a more decentralized network.

Additionally, PoS helps maintain price stability in cryptocurrencies by using transaction fees as a reward instead of creating new coins as rewards for miners. This reduces the supply of newly created coins, preventing price fluctuations caused by an influx of new coins in the market.

Despite its advantages, PoS has some weaknesses. Large stakeholders in the network can gain more influence over time, potentially leading to centralization. PoS is a relatively new technology; its flaws and vulnerabilities are still being researched and addressed. The "Nothing at Stake" problem poses a challenge in situations where multiple blockchains are created due to forks, as nodes have little to no disadvantage in supporting multiple blockchains.

In conclusion, Proof of Stake protocols offer an alternative to the energy-intensive Proof of Work algorithm. PoS provides a more energy-efficient and decentralized approach to reaching consensus in a blockchain by selecting validators based on their stake in the cryptocurrency. While PoS has its own challenges and vulnerabilities, ongoing research and development aim to address these issues and make PoS a viable option for secure and efficient blockchain networks.


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