Everything you need to know about Proof of Stake

Having difficulties in understanding Proof of Stake (PoS)? If you do, please read on. This article will explain the concept in detail.

What is Proof of State (PoS)?

Proof of Stake (PoS) is a type of consensus algorithm through which a cryptocurrency blockchain network aims to reach distributed consensus. The concept states that an individual can mine or verify block transactions based on how many coins they have. Hence, miners have greater mining power with increasing number of coins they own. The PoS was created as a substitute for Proof of Work (PoW) to resolve its challenges. The first crypto coin to adopt the PoS method was Peercoin, with Blackcoin, ShadowCoin, and Nxt adopting soon after. In PoS cryptocurrencies, the creator of the next block is elected through different combinations of random selections.

When a crypto transaction is instigated, the transaction data is transformed into a block with a maximum of 1 Megabyte capacity before being replicated across several nodes or computers on the network. The nodes have the status of administrative body in the blockchain and are used to legitimate digital transactions in each block. To perform verification, the miners or nodes would need to solve a computational problem. The first miner to solve each block transaction puzzle is rewarded with a percentage of the coin they are mining. Once a block has been confirmed, it’s added to a public transparent ledger called blockchain.

Mining requires a lot of computing power to perform multiple cryptographic calculations to solve computational problems. The computing power results in a large amount of power and electricity required for PoW.  In 2015, a veritable source published a study showing that one Bitcoin transaction requires electricity equivalent to the daily usage of 1.5 American houses. To pay the electricity bills, miners would normally sell their awarded cryptocurrency for fiat money, which would translate into a downward movement in the coin’s price.

The PoS addresses this issue by assigning mining power to the percentage of coins held by the miners. Unlike PoW that uses energy to solve the problems, a PoS miner is restricted to mining a portion of transactions that’s reflective of their ownership stake. For example, a miner who owns 5% of the coin available can theoretically mine only 5% of the blocks.

Bitcoin employs a PoW system that makes it susceptible to the ‘’Tragedy of Commons’’. The ‘’Tragedy of Commons’’ describes a scenario in the future where there are fewer Bitcoin miners due to little or no block mining reward. The sole return will come from transaction fees, that would also reduce over time. With fewer miners, the network becomes increasingly exposed to a 51% attack, which occurs when a mining pool or miner controls 51% of the computational power. They can create fake blocks of transactions, while nullifying others’ transactions in the network.

However, by implementing PoS, the attacker would have to obtain 51% of the coins to execute a 51% attack. The PoS avoids this attack by rendering it disadvantageous for a miner with 51% coins to attack the network. While it would be expensive and difficult to amass 51% of a cryptocurrency, a miner with 51% stake in the digital coin is unlikely to attack a network where he holds a large majority of coins. If the price of a coin falls, this means that worth of his assets would also fall. Hence, the majority stakeholder would prefer to maintain a secure network.

In a nutshell… Proof of Work VS Proof of Stake

PROOF OF WORK

  • Miners compete to solve a difficult puzzle using their computer’s processing power.
  • To add a malicious block, one must have a computational power that is 51% more powerful than the network.
  • The first miner to solve the puzzle is given a reward for their efforts.

PROOF OF STAKE

  • There is no competition as the creator of the block is chosen by an algorithm based on the user’s stake.
  • To add a malicious block, one must own 51% of all the cryptocurrency on the network.
  • There is no reward for creating a block. Instead, the block creator earns a transaction fee.

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Disclaimer: This article is not trading or investment advice. It is for entertainment and education purposes only. Please do your own research before investing into any digital currency.

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