Proof of Stake was developed as an alternative consensus algorithm of Proof of Work. Proof of Work is the original consensus algorithm in the blockchain. It is still very reliable, but it has its drawbacks. As we have seen in our previous article, miners compete against each other to solve the challenge and get the ‘nonce’ value to mine a block. Each miner uses a considerable amount of resources like electricity, computing power to address the problem proposed by the network. In the end, only one miner gets to find the solution and the resources used by the other miners get to be utterly wasted. This is a very costly process considering the amount of energy each miner uses. As per the statistics it is estimated that bitcoin currently consumes 66.7 terawatt-hours per year. This is equivalent to the amount of power consumed by the entire Czech Republic, a country with 10.6 million people. Hence, we can understand the need and necessity of an alternate consensus algorithm.
What is PoS?
PoS algorithms achieve consensus by requiring the users to stake a certain amount of native currency in the platform to get a chance of being selected as a validator and thereby gaining a reward for acting as a validator.
To put in simple terms, the validators should possess the native currency of the network to act as a validator. The selection of the validator by the network is a random process but weighed by the amount of the currency they hold and on how long they have been holding the currency.
In order to validate a block, the validators must stake a certain amount in a virtual safe which is locked for a certain time period. Depending on the amount they stake they get selected. There are more chances for one to be chosen as a validator if one stakes more currency when compared to others. Say four validators in a network can stake 40, 30, 20, 10 coins each respectively, the chances are that the one who stakes 40 coins will be selected as a validator. But it’s the not the wealthiest person in a network who validates the block all the time. The first part is that each of the validators should stake some amount in a bid to be selected as a validator. The second part plays the role of choosing the validator randomly.
Two most commonly used ways to select validators randomly are Randomised Block selection and Coin Age selection. Randomised Block Selection validators are chosen based on the combination of the lowest hash value and the highest stake. In the Coin Age selection method, the validators are chosen based on how long their currency has been staked for. These are not limited ways of selecting a validator, but each platform that uses PoS use the combination of given methods or use their own methods. The intention is always to make the consensus algorithm better and better.
One interesting fact to note at this point is that the validators are also called forgers in the networks which use PoS as consensus algorithm as opposed to miners in the networks that use PoW. In the case of PoS, all the currency is generated at the starting of the network itself. Only transactions are being validated in the network from time to time. The forgers are incentivised by paying transaction fees. In PoW, bitcoins are mined from time to time as a reward for miners. Though both PoW and PoS work towards gaining consensus in the network, their approach towards it is entirely different.
Peer Coin is an example of a coin that uses PoS as its consensus algorithms.
Advantages of PoS
- Uses considerably less energy when compared to PoW thus making it environment-friendly, which is the need of the hour. This also encourages more and more users to participate in the network.
- Truly decentralised since there is no need for large mining pools as required in PoW, thus fulfilling the fundamental property of the blockchain.
- Secured network. There couldn’t be a malicious node trying to destabilise the network. The users have to stake their own money to be selected as a validator. It will be a huge loss for the validator if one forges fraudulent transactions as the deposit will be lost as a penalty.
Let’s see more on Security below
To destabilise a network, a validator must approve fraudulent transactions. To approve fraudulent transactions, one should be able to gain control over the network. To gain control over the network, one should own 51% of the total currency. Which is highly infeasible. If achieved, one must stake the money and be a validator to approve the fraudulent transactions. Then one can destabilise the network. But the one who destabilised will be at a major loss financially than anyone else. As the currency will lose its credibility, and since the one is holding a significant share, he would be at a big loss. Other validators will usually ramp up and leave the network. This is generally called a 51% attack. This is highly unlikely in case of PoS. But if we compare the same with PoW, the miners wouldn’t be at any loss to achieve this, as they will not lose their hardware.
Disadvantages of PoS
The main disadvantage of PoS is the problem the industry experts call ‘Nothing at stake problem’. There is often the possibility of forking in a blockchain network. Forking is nothing but splitting the current network into two. There could be many reasons for forking like inflate the liquidity of the current cryptocurrency, unfortunate attacks on the network etc. In such cases, forking is inevitable. In such an event, the validators can choose any of the two blockchains, thus making it an ever-ending conflict. In PoW, this is not possible because of the hardware issues, as they cannot split the hardware into two. Hence different blockchains are coming up with their workarounds. For example, Etherium, which is trying to move to PoS from PoW, has come up with a solution whereby asking the validators to deposit a fixed amount in the network. They will forfeit the deposit if they sign up for multiple blockchains in the event of a fork.
PoS is a very effective consensus algorithm fulfilling the essential properties of the blockchain. Different cryptocurrencies use different forms of PoS, modifying it to their requirement. However, more and more consensus algorithms are being developed to make the blockchain more efficient in terms of the number of transactions per second, while not compromising with the inherent properties of the blockchain. We will see other consensus algorithms in our upcoming articles.