Proof-of-stake (PoS)

Undeservedly, blockchain has a reputation for being difficult to understand and impenetrable. The consensus process, which is essentially how blockchain users agree on past, present, and future transactions, has a lot to do with this. Here, we debunk proof of stake, a consensus mechanism that appears set to rule the bitcoin world.

What is Proof-of-stake? 

The foundation of blockchain technology and cryptocurrencies is decentralization. A blockchain’s data and transaction history are managed and decentralized without a central gatekeeper. Instead, the network relies on many users to approve incoming transactions and add them as new blocks to the chain.

The consensus technique known as proof of stake helps determine which individuals can undertake this profitable duty. This activity is valuable since the selected participants will receive fresh cryptocurrency if they successfully validate the new data and don’t manipulate the system.

According to Marius Smith, head of business development at digital asset custodian Finoa, “we claim that participants have achieved consensus when blockchain participants verify that a transaction is authentic and add it to the blockchain.”

Proof of stake involves people called “validators” locking up predetermined quantities of bitcoin or crypto tokens—their stake, so to speak—in a blockchain-based smart contract. In return, they can vouch for new transactions and receive a reward. However, they risk losing all or part of their interest if they incorrectly validate false or fraudulent data.

Some major cryptocurrencies that employ proof of stake include Solana, Terra, and Cardano. In addition, proof of stake is gradually replacing proof of work in Ethereum, the second-largest cryptocurrency by market capitalization behind Bitcoin.

Understanding staking

Staking is the agreement to lock up a certain quantity of bitcoin in return for the opportunity to verify newly added data blocks to a blockchain. These “stakers,” also known as validators, invest their cryptocurrency in a smart contract that is stored on the blockchain.

Depending on how much cryptocurrency each validator has invested, the blockchain algorithm chooses validators to examine each new block of data. Your chances of being selected to perform the work increase as your stake increases. The validator receives newly created cryptocurrency as payment when the data they have cleared is recorded on the blockchain.

According to Doug Schwenk, CEO of Digital Asset Research, “the straightforward way to view it staking is like interest income that requires you to execute a task to earn the interest—checking blockchain transactions.” “I can earn interest on my assets if I only confirm good deals. Bad transactions will result in penalties and the loss of part of my assets if I mention them.

A validator may be subject to “slashing” if they submit inaccurate data or fraudulent transactions. Their stake is “burned,” or transferred to a wallet address that no one can access, rendering them completely useless.

Smith claims that proof of stake works because validators are expressing their willingness to put their own money on the line to support a transaction’s integrity. Additionally, validated transactions are rewarded with cryptocurrency in proportion to the stake size.

How does the Proof of Stake work?  

Blockchain technology incentivizes traders to verify transactions by paying them in cryptocurrency for each valid verification. Proof-of-stake systems force traders to “stake” some of their bitcoin as collateral, which is subsequently locked up in a deposit, as a defense against fraud. A trader may lose some of their stakes if they upload a transaction to the blockchain that other validators find invalid.

The lowest amount that validators are typically permitted to stake is stated. Validators are free to stake as much as they like once the cap has been reached. In reality, the algorithm is more likely to select a trader whose stakes are higher.

Let’s use a straightforward scenario to demonstrate the point: suppose the blockchain has recently undergone a change that needs to be verified. To validate it, ten nodes volunteer, each stake one cryptocurrency. Accordingly, they each have a 10% probability of getting chosen for the job.

Let’s assume that one volunteer is genuinely motivated to get the job. By putting three coins on the deal, they could increase their chances. They would increase their chance of winning the task to 25%, while everyone else’s chances would decrease to 8.3 % if they maintained their bet at one coin.

In reality, it’s far more complex than that. This is because blocks of new transactions, sometimes numbering several hundred or more, are put together. Then, several blocks are linked together to provide a list of every transaction in chronological order. The ability of traders to join staking pools, where groups of validators can jointly determine the lower threshold for becoming a validator, adds another layer of complexity.

A Proof-of-stake workflow: 

• A node performs transactions. These transactions are all pooled together using the PoS algorithm.
• Every node vying to be the next block’s validator raises a stake. To choose the validator, this stake is used with additional criteria like “coin-age” or “randomized block selection.”
• The block is published after the validator has verified the block. His stake is still locked, and the forging prize still needs to be given. This is necessary so that the network’s nodes can “OK” the new block.
• The stake and reward are returned to the validator if the block is approved. The validator for the current block gets its coinage reset to 0 if the algorithm chooses validators based on coin age.
• The validator forfeits its stake, and the algorithm marks the block as “bad” if other network nodes do not confirm it. The procedure to forge the new block once more begins at step 1.

Proof-of-work vs. Proof-of-stake: 

Although each method has advantages and disadvantages, they have all demonstrated effectiveness at maintaining a blockchain. The two algorithms, however, take very different approaches.

Block creators are known as validators in a PoS system. A validator examines transactions, confirms activity, votes on results, and keeps records. Block creators are referred to as miners in PoW. To validate transactions, miners try to get a cryptographic integer hash. They receive a coin as payment for cracking the hash.

You need to possess enough coins or tokens to qualify as a validator on a PoS blockchain to “purchase into” the role of a block maker. For PoW, miners must make significant investments in processing hardware and pay high energy costs to power the machines running the computations.

PoW mining requires expensive energy and equipment, restricting who may mine and increasing the blockchain’s security. On the other hand, blockchains with a PoS model require less computing power to verify blocks and transactions. Additionally, the approach reduces network congestion and eliminates PoW blockchains’ motivation based on rewards.

Merits of Proof-of-stake: 

• Energy-saving: As none of the nodes is vying with one another to add a new block to the blockchain, energy is conserved. Additionally, energy is saved since no problem needs to be resolved (unlike in a Proof-of-Work system).
• Decentralization: Further incentives of exponential incentives are in place to join a mining pool, which results in a more centralized structure of blockchain in blockchains like Bitcoin. In a Proof-of-Stake-based system (like Peercoin), payouts are linearly proportional to the stake amount. Therefore, joining a mining pool gives no advantage over other methods, fostering decentralization.
• Security: To attack a network, a person must control 51% of the stakes (pretty expensive). This results in a safe network.

Demerits of Proof-of-Stake: 

• Large stake validators: A group of validator candidates will have a greater chance of becoming validators if they pool their resources and own a sizable portion of all cryptocurrency. Increasing chances results in expanding options, which expands forging reward-earning opportunities and expands ownership of a sizable currency portion. As a result, the network may eventually centralize.
• Technology: PoS is still a very young technology. Ongoing research is being done to identify weaknesses, correct them, and make a live network with actual money transactions feasible.
• The “Nothing at Stake” problem: In a blockchain split, supporting several blockchains would put nodes at little to no disadvantage (blockchain forking). The worst-case scenario is that every fork results in many blockchains, validators are employed, and nodes in the network can never reach a consensus.

How secure is proof-of-stake? 

Proof-of-stake is just as vulnerable to a 51% attack as proof-of-work, but the attackers run a higher risk. This is because 51% of the ETH stake would be required for an attack. They could then utilize their attestations to ensure that the branch they liked had the most overall attestations. 

Consensus clients choose the proper chain based on the “weight” of accumulated attestations. Therefore this attacker might make their fork the canonical one. Proof-of-stake, as opposed to proof-of-work, has the advantage that the community is free to launch a counterattack. 

For instance, the good validators may ignore the attacker’s fork and continue developing on the minority chain while enticing the apps, exchanges, and pools to follow suit.

One type of harmful activity is 51 percent of attacks. Attacks by malicious parties could be long-range (although the finality device neutralizes this attack vector), short-range (although proposer boosting and attestation deadlines minimize this), bouncing and balancing, or avalanche (neutralized by the fork choice algorithms rule of only considering the latest message).

Overall, it is a fact that proof-of-stake, as it is implemented on Ethereum, is more economically secure than proof-of-work.

Conclusion: 

The proof-of-stake (PoS) protocol is intended to decrease network congestion and environmental sustainability concerns. Due to the competitive nature of proof-of-work as a method of transaction verification, people are compelled to seek for advantages, especially when money is at stake.