The proof of stake method is drawing a lot of recognition these days, with Ethereum shifting over to this method from the proof of work method. Proof of stake is a substitute method for transaction confirmation on a blockchain. It is developing in recognition and being utilized by various cryptocurrencies. To know the proof of stake, it is essential to know the fundamental meaning of proof of work. The proof of work arrangement is utilized by Bitcoin and most other significant cryptocurrencies.
Story and concept
Proof of Stake (PoS) was first achieved in the crypto project Peercoin by an unidentified developer named Sunny King. The white paper was published on 19 August 2012. However, PoS as a consensus mechanism was already explained in 2011 in bitcoin trips.
The majority needed for a decentralized consensus is essentially created by PoS over the credit rather than by the hash function as in Proof of Work. Therefore, the more credit you have, the more likely you will be able to create a block. For the selection of those who are allowed to produce the block in the network, there are different approaches.
Peercoin, for example, is not 100% PoS but also incorporates PoW with variable target hash area. The target hash depends on the coinage and the coins endured. Coinage or age of coins designates how long the coins are already on an address. The higher the Coinage * Coins sum of his address, the greater the target hash area of the possible block generator. So, of course, for someone who keeps a lot of coins long, it’s easier to find a block. Mining is optional in PoS. It may be that the coins have all been produced in advance. Peercoin, for example, pays the block producers.
Proof of Stake
Unlike the proof of work method, in which the user authenticates transactions and produces distinct blocks by executing a definite amount of computational operation, proof of stake method needs the user to designate possession of a definite number of cryptocurrency factors.
The producer of a new block is determined in a pseudo-random process, depending on the user’s assets, also described as ‘stake’. In the proof of stake method, blocks are stated to be reproduced or created, not mined. Users who authenticate transactions and generate new blocks in this method are mentioned as forgers.
In most proof of stake circumstances, cryptocurrency sections are built at the launch of the currency and their quantity is decided. Hence, rather than utilizing cryptocurrency factors as a prize, the forgers accept transaction fees as prizes. In several events, new currency blocks can be produced by mounting the coin accumulation, and forgers can be compensated with new currency blocks produced as prizes, rather than transaction charges.
Benefits of PoS
- The power consumption is much lower than PoW because the calculations are eliminated.
- Anyone who has coins can produce blocks.
- In PoW, the power of block producers is increasing exponentially, as high-investment miners get more discounts on acquiring lots of hardware than participants who can afford less. In PoS, the influence increases linearly. Thus, redistribution within the system remains more or less stable.
- Big companies that have led to centralization in PoW by optimizing the hardware components like Bitmain are excluded from PoS.
Disadvantages of PoS
Above all, proof of stake is still a vague concept. There are only rare projects that realize PoS mainly because of the following problems:
- In case of a fork, the next block producer can simply steal both chains. In PoW the block producer would have to mine on both chains, which would give him higher energy costs. POS eliminates these additional costs. In PoS, therefore, an economically minded staker always accepts both chains, no matter which chain commands in the end. Because if the branch controls, on which he did not remain, the reward is gone. This problem is also called a “nothing at stake” problem and it has not yet been convincingly resolved.
- In PoW, an attacker has to spend more than a block to restructure the chain, as has been done by the entire network since that block. Computing is as good as the only thing one can not fake or simulate with computers. In PoS, on the other hand, one could simulate the whole chain and all historical processes on it with a computer, or in this way generate a chain with more stake than the existing ones. So it would be unclear to the network which chain is now honest. This is currently solved with checkpoints. The nodes get block hashes of the valid chain they save. They do not accept an alternative chain that does not contain these block hashes. They have to be online all the time. In Peercoin there is a central instance that radiates these block hashes in the network.
- Another problem is the choice of the block producer. In PoW it is random. If you find a valid block hash first, you can produce the block. For pure PoS systems, the selection is difficult. It is important that the choice happens by chance. The algorithm must be publicly known so that all can authenticate the choice. It is extremely difficult to involve a random process within the consensus mechanism that can not be manipulated. For example, consider a system that takes the block hash of the current block to determine the next block producer. Now the current block producer could search for hashes, which in turn makes him or a preferred party the next block producer. In this case, we would have an indirect PoW.
If one highlights the disadvantages of PoS one sees only the efficiency of Nakamoto’s PoW. The above-mentioned problems solved by PoW are yet to be solved in PoS or must still be shown that they are solvable at all. Peercoin is considered as a central system with its checkpoints. Crypto enthusiasts are looking forward to Ethereum with his PoS protocol Casper and Cardano with Ouroboros.
Ethereum and Cardano are working on the implementation of a functioning PoS because a decentralized PoS is possible, this would put an end to the enormous energy waste of PoW.
Disclaimer: This information should not be interpreted as an endorsement of any cryptocurrency. It is not a recommendation to trade. The crypto market is full of surprises and overhyped assets. Do your research before buying anything. Do not invest more than you can afford to lose.
Instant Crypto Credit Lines™ from only 5.9% APR. Earn up to 8% interest per year on your Stablecoins, USD, EUR & GBP. $100 million custodial insurance.
Trading Bitcoin is too complicated?
We highly recommend our Crypto-Starter-Kit to you!
Follow us on Social Media and subscribe to our free crypto newsletter!
Diskutiere mit uns!
This post may contain promotional links that help us fund the site. When you click on the links, we receive a commission - but the prices do not change for you! :)
Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
Trading with financial products, especially with CFDs involves a high level of risk and is therefore not suitable for security-conscious investors. CFDs are complex instruments and carry a high risk of losing money quickly through leverage. Be aware that most private Investors lose money, if they decide to trade CFDs. Any type of trading and speculation in financial products that can produce an unusually high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future.