Proof-of-stake

Proof-of-stake(PoS) is a type of blockchain consensus algorithm that relies on participants having an economic stake in the success of the network. This is in contrast to proof-of-work (PoW) based systems/algorithms, in which the algorithm rewards participants who solve computationally expensive puzzles in order to validate transactions and create new blocks (i.e. mining). In PoS, the creator of the next ledger update (eg a blockchain block) is chosen in a deterministic and pseudo-random way, in which the probability that an account is chosen depends on the account's stake in the system (e.g. its wealth in a system).

Proof-of-stake has been contrasted to proof-of-work as virtual mining, simplified with the phrase "One coin, one vote" as compared with proof-of-work's "one cpu, one vote." Users are required to "stake" their cryptocurrency to become a network validator.

PoS was designed to reduce the scalability and environmental sustainability concerns that existed with the PoW protocol. The PoS mechanism seeks to solve these problems through the substitution of stake for compute power, which is intended to reduce the computational power consumed by a network, especially as miners can no longer rely on massive farms to gain an advantage in the network.

Staking in PoS refers to when a user agrees to lock up an amount of cryptocurrency in exchange for the chance to validate new blocks of data to be added to a blockchain. These validators, or stakers, put the cryptocurrency into a smart contract held by the blockchain. Further, the blockchain uses an algorithm to select a validator to check each new block of data, based on the amount of currency they have staked. The more staked, the more likely they are chosen to do the work.

When the data has been cleared, the validator then receives newly minted cryptocurrency as a reward, and the data is added to the blockchain. However, if a validator submits bad or fraudulent data, they could be punished by "slashing," a process in which the stake of the validator is burned and rendered useless.

Proof-of-stake was first proposed on an online forum called "BitcoinTalk" on July 11, 2011. It was supposed to be the mechanism to secure Ethereum from the blockchain start, according to the whitepaper, but it was also considered to be impossible. This led to Ethereum launching with a PoW model. The first example of a blockchain utilizing a PoS system was Peercoin, proposed by Sunny King and Scott Nadal in 2012. Other early PoS blockchains include Blackcoin and NXT.

Naive PoS algorithms suffer from the nothing-at-stake problem. The nothing-at-stake problem is characterized by the incentive for network participants to contribute blocks to every potential blockchain fork to ensure they receive a block reward on the winning chain. This problem has been compared with modern economic theory, where if a validator acts in their own self-interest, they neglect the integrity and security of the network as a whole, described by the tragedy of the commons.

A number of blockchains have transitioned, or are in plans to transition from PoW to PoS. Ethereum, for example, plans on moving from a PoW protocol using Ethash, to s PoS consensus protocol utilizing Casper.

A variety of types of PoS have been developed and implemented across blockchain networks.

Proof-of-stake and proof-of-work are two of the most popular mechanisms for blockchain. They are similar in that both mechanisms require and rely on a distributed network of participants to agree on which new block of transactions are added to a digital ledger. Where they differ is how they reach this point.

In PoW, the agreement on which block is added requires a network participant to expend a large number of computational resources and energy on generating new valid blocks. Whereas, a PoS mechanism, as explored above, requires a user to stake cryptocurrency and then validate or approve transactions, for which they are rewarded. This also works to make a more egalitarian blockchain, in which the arms race of large computation centers and the necessary power draws are avoided, and instead, a user receives as many votes, and greater importance, based on how much they have staked.

Proponents of PoS suggest that one of the key advantages of the protocol, compared with PoW, is that it offers an economic incentive to play by the rules of the blockchain. This is especially as any bad transaction or data committed to the blockchain result in the validator's stake being burned. The following are other proposed advantages of PoS:

Proof-of-stake eliminates the use of high-powered computing from the consensus mechanism for securing blockchain networks used by proof-of-work. This makes PoS more energy-efficient and environmentally friendly when compared with PoW consensus mechanisms being used by cryptocurrencies such as Bitcoin and Dogecoin.

PoS incentivizes security through rewards and punishments for behaviors that make the PoS network more or less secure. Some critics view PoS staking as creating more security or less security for PoS networks. If stakers attempt to attack PoS networks, they may have their stake in the network taken away from them for acting maliciously towards the network.

Proof-of-stake also supports decentralization because PoS is more likely to produce more nodes on the network compared with proof-of-work consensus mechanisms, due to lower barriers of entry. There are no hardware requirements necessary to become a validator on a PoS blockchain network, making individual validators more likely to be chosen to create new blocks without the need for investing in expensive mining equipment and energy required by PoW consensus.

The security and scalability properties of PoS mechanisms as compared with PoW mechanisms continue to be debated in the blockchain community. PoW uses an external form of collateral in the form of computational and energy resources to secure the network, which incentivizes miners to not act maliciously toward the network because mining is resource-intensive.

One drawback of the PoS mechanism is its susceptibility to the so-called 51-percent attack. This attack is a situation in which a person or group has pooled resources to control more than 50 percent of authentication capabilities. Both PoW and PoS are susceptible to this attack, but in a younger or lower-valued blockchain, it can be less expensive, and therefore easier, to acquire enough cryptocurrency and stake to gain this advantage over other participants. However, the PoS logic discourages this type of exploit, as such an attack on a platform would almost certainly negatively affect the value of the cryptocurrency these individuals are holding.