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Understanding Proof-of-Stake

Basics Mining

In 2002, a team of space scientists at the University of California, Berkeley came up with some software called “Berkeley Open infrastructure for Network Computing” – or BOINC, as it’s affectionately known.

The goal of BOINC was to use a small portion of the power of individual computers around the globe to help scientists at the Search for Extra-terrestrial Intelligence (SETI) Institute plough through space radio signals in the hunt for alien life signs!

Concept sound familiar?

Yup, that’s because it’s just like how Bitcoin uses the compute of a globally dispersed network of computers to mine and maintain the blockchain.

In 2015, a researcher called Rob Halford came up with the idea of connecting BOINC to a cryptocurrency, having realised the similarities between the software’s operation and Bitcoin’s. He thought that if individuals were rewarded with crypto for their efforts, it would draw additional miners into the network and everyone would benefit.

In order to pull this off, though, they would have to create a new type of blockchain that didn’t rely on creating proof-of-work hash (it would’ve been near impossible to convince people to buy expensive mining rigs), and thus, the proof-of-stake algorithm was born…


What is Proof-of-Stake?

Proof-of-stake (PoS) is an algorithm used by a growing number of cryptocurrency blockchain networks, like Dash, Lisk and NAV Coin.

The end goal of proof-of-work (PoW) and PoS algorithms is identical: to validate transactions and achieve distributed consensus. It’s just their process for getting there that differs.


How it Works

Unlike with PoW algorithms – which were the original innovation of the Bitcoin blockchain – with PoS, the person who creates the next block is chosen not by who works out the hash by brute-forcing the calculation of complicated maths problems, but by a combination of random selection, wealth or age of the coins they hold in their wallet – their stake.

This deterministic selection process means that there’s no direct mining payout like with PoW. Instead the “Forgers” (a miner’s PoS equivalent) collects transaction fees on the network as payment.

In order to prevent dominance of the foraging process being handed undemocratically and perennially to whoever had the biggest coin balance, several types of selection methods have emerged.

The PoS algorithms used varies between coins, and innovations on the way the algorithms work are becoming key USP battlegrounds for cryptocurrency projects.

Two of the most common types are Randomised Selection algos and Coin-age Selection.

Randomised Selection

In this variant of PoS algorithm, the node awarded the next block is chosen via a formula that checks for the lowest hash value + the size of the stake and then gives a reward.
Because stakes are public, each node can more or less anticipate which account is most likely to win the right to generate a block.

Coin-age Selection

This concept is built on top of the randomised selection process. In addition to the randomisation, the amount of time that coins in that node’s wallet have remained unspent multiplied by how many there are, gives the “coin age”.

The older and larger the stash of coins are, the higher the probability there is of signing the upcoming block. However, once those staked coins have been used to sign a block, their coin age is reset to zero and they have to wait another pre-defined number of days before being eligible to generate a new block.

As an additional way of making sure that the blockchain isn’t dominated by a node holding particularly old and large holdings of the coin, the probability of the next block being found is maxed out at a specified number of days.

This secures the network and gradually generates new coins over time without the requirement of burning tons of computer power.


PoS Pros?

The number one advantage PoS has over PoW algorithms is that fact that they are far less energy intensive.

Did you know, that energy-wise it takes the equivalent of burning roughly 16 gallons of gasoline to mine a single bitcoin?!

These costs are also paid in fiat the majority of the time, so there’s constant downward pricing pressure.

On top of this, there is an argument that the incentives of block generators in PoS coins are much more aligned with the coin’s community.

In PoW, the miner may own none of the coins they’re mining – they’re just out there looking to make some cold hard cash. This means that the miner’s loyalty isn’t to the coin but to their bottom line and they could hop onto mining another more profitable coin at any time.

In PoS, the forgers are always owners of the coins they’re staking.


PoS Cons?

As with anything, there are some critics of PoS being a top option for distributed consensus.

One of the most common arguments is called the “nothing at stake” problem. This theory basically states that if there were a consensus failure, the forgers have nothing to lose if they vote for multiple blockchain-histories, meaning that consensus would never resolve.

The cost of working on several chains (unlike with PoW systems) is minimal, so anyone could theoretically abuse this loophole to double-spend.

This said, there have been many attempts to think through and solve this problem, including:

  • Ethereum’s PoS protocol CASPER
  • Peercoin’s broadcast checkpoints system, which prevents any blockchain reorganisation deeper than the last known checkpoints.
  • Decred’s PoW/PoS hybrid, where PoW miners mine blocks and PoS acts as a secondary authentication mechanism.