What Is Proof-of-Stake?
With Ethereum and a few other coins switching over to the Proof-of-Stake (PoS) system, more people in the crypto community are interested in this new consensus model for digital transactions.
Before the PoS system was implemented, Proof-of-Work (PoW) was the only method of reaching a consensus in the blockchain. Proof-of-Work is a mining process whereby a powerful computer is installed to solve complex mathematical problems that verify transactions and produce new coins within the blockchain network. However, as the use of cryptocurrencies like Bitcoin grew, this became a challenge because it led to increasingly difficult mathematical problems, slow transactions speeds, and massive power consumption.
Compared to PoW, PoS solves most of the drawbacks, like transaction speeds and power consumption. Hence, it is more scalable.
How Does Proof-of-Stake Work?
Like in a PoW based blockchain network, the primary objective is to reach a consensus to validate transactions. PoS-based systems achieve consensus by allowing users to stake a number of their tokens for a chance to get rewarded if chosen to confirm transactions.
The new block miner, also known as a forger, is chosen in a two-part process. The first process is for determining the number of stakes the user is staking. And to own a stake, each validator must deposit some tokens into the system to use as a digital collateral.
In PoS systems, there’s a degree of pure chance in the selection process to avoid scenarios where the wealthy are picked to validate transactions every time. Most PoS blockchain networks use these two methods — randomized block selection and coin age based selection.
With a right combination of the lowest hash value and the highest stakes, forgers can get selected from a pool of users in a randomized block selection. The coin age based selection method picks forgers based on the time they spent staked. Some cryptocurrencies have also been experimenting with different methods.
Each forger must put his coins at stake when validating transactions in a PoS based system. This also serves as a deterrent to malicious activity; if any forger tries to authorize a fraudulent transaction, they will lose their holdings. It is like when someone puts their money in escrow that only releases their funds after meeting the specific conditions of the trade.
There are many cryptocurrencies today that use the PoS system to validate transactions, such as BlackCoin, Lisk, Nxt, and Peercoin.
Ethereum is also developing an algorithm to implement the PoS called Casper. According to , there are several branches of Casper — Casper the Friendly Finality Gadget (FFG) and Casper the Friendly Ghost: Correct-by-Construction (CBC). This research aim at finding different ways to implement the PoS algorithm.
Advantages of Proof-of-Stake
The main benefits of using the PoS system in a blockchain network are the speed and security it provides compared to the PoW system. It is also easier to scale it with energy efficiency at every stage.
Proof-of-Work vs. Proof-of-Stake
Using a PoS system helps validators save power because they do not have to use their computing power to validate transactions. Instead, the only factors that affect their chances of being selected to authenticate transactions are coins owed and current blockchain network complexity.
Apart from energy savings, PoS systems also offer a more secure trading environment from hack attacks. For instance, if a hacker were to buy 51% of the total number of a cryptocurrency, the market would react by fast price appreciation. Also, if a validator makes invalid blocks within the system, it will be rejected and deleted, and their privilege will be removed as part of the network consensus.