What is Proof of Stake in Blockchain? Is it The Best Consensus Algorithm?
By: Someshwaran M
Tags: Bitcoin, Crypto, Cryptocurrency, Proof Of Stake, Blockchain

What is Proof of Stake?

It is a system where a user who has the recognizable number of coins in the chain is the one who’d be able to perform mining or validate the blocks. The user or called the creator of a new block is chosen in a pseudo-random way, this user is called as a Validator or a Forger under the Proof of Stake algorithm.

You might ask me is the privilege of mining or validating is given to the person who has a higher number of coins in the group? To answer this question, I’d recommend you to follow this episode till the last!

Before diving into the concept, let me explain the terms which are used regularly under The Proof of Stakes:

The first one would be the Validator or Forger who is called as the miner in the Proof of Work system.

The next term would be the User’s Wealth in the Proof of Work system is called a stake in the Proof of Stake system.

And, under the Proof of Stake, the blocks are minted or forged, not mined as such in Proof of Work.

Hope this would give you a brief idea about the terminology used in this episode.

The Top Eight Cryptocurrencies which use The Proof of Stake Algorithm.

Let me drill down to the concepts and architecture of Proof of Stakes.

So, Let’s Start With, What a Validator Should Do in the Proof of Stake System to Have the Blocks Minted?

Initially, there will be a pool of validators in the Proof of Stake ecosystem where the validators lock up some of their coins as a stake to participate in the mining. By locking up their coins, the validators bet on the blocks which they feel would be added next to the chain. When the block gets added to the chain, the validators get a block reward in proportion to their stake.

For instance, let’s assume, a validator who owns 10% of a certain cryptocurrency, for example, let’s say Ethereum, the validator would be able to mine only 10% of the blocks as he owns only 10% of its currency and Not more than that. This eventually gives equal opportunity for other validators in the ecosystem.

Also, referring to the words of Vitalik Buterin, co-founder of Ethereum,

“A forger automatically get inducted after some time once he locks his stake in the pool of validators. There is no any such scheme for getting inducted into the validator pool, anyone can join in any round they want, irrespective of the number of other joiners in the same round, the reward of each validator will be somewhere around 2–15%”.

Also, there will be no restrictions or limitations on the number of active validators (or forgers), but in case, if there are too many validators, then the interest rate or the reward will be regulated economically.

if the validator validates a fraudulent transaction, then he loses his stake which was initially locked up in the pool, and he also loses his rights to participate as a forger in the future.

For the Proof of Stake method to work effectively, there needs to be a way to select which user gets to forge the next valid block in the Blockchain which is eventually called Block Selection Methods.

Selecting the forger by the size of their account balance or coins would result in a permanent advantage for the richer forgers.

Like I said earlier in this episode, the block selection methods do play a major role in the Proof of Stake algorithm. The most popular of these methods are the ‘Randomized Block Selection’ and the ‘Coin Age Based Selection’ methods. These methods use the pseudo-random algorithm to choose the forger instead of the size of their account balance.

Let’s See What is the Randomized Block Selection Method?

In the randomized block selection method, a next forger is picked based on the combination of the lowest hash value as well as the size of their stake. Since the size of the stakes is made public in validators pool, the users in the ecosystem would be able to predict the next forger of the block. The cryptocurrencies like NXT and Blackcoin use this randomized block selection.

And, what is Coin Age-based Selection?

The coin age-based system selects the next forger based on the ‘coin age’ of the stake the potential forger has put up. Coin age is calculated by multiplying the number of days the cryptocurrency coins have been held by the forger as a stake to the number of coins that are being staked.

Before competing for a block the coins must have been held for a minimum of 30 days. Users who have staked older and larger sets of coins have a greater chance of forging the next block. Once a user has forged a block, their coin age is reset to zero and the users must wait at least 30 days to sign another block. The user can forge the next block within a 90 days period, this process prevents the users with very old and large stakes from dominating the Blockchain thereby making the network more secure. Because a forger’s chance of success goes up the longer they fail to create a block, forgers can expect to create blocks more regularly. This mechanism promotes a healthy and decentralized forging community. The cryptocurrencies like Peercoin uses both coin age as well as the randomized selection method to select the next forger. This, in turn, makes the process a bit difficult to hack.

The Proof of Stake systems is more environmentally friendly and efficient, as the electricity and hardware costs are much lower than the costs associated with mining in a Proof of Work system. A greater number of people are encouraged to run and join the pool as it is easy and affordable to participate in this system, this results in more decentralization.

I believe this is a rapidly evolving industry, and apart from the Proof of Work and the Proof of Stake system, there are currently several other systems and methods of transaction verification and block creation are being tested and experimented.

You May Ask Me “Do You Think the Proof of Stake is More Secure Than Proof of Work as This Involves More and More Participants to Forge the Blocks”?

Let me explain, by using a Proof-of-Work system, hackers and the malicious players are cut out due to expensive machining and computational power requirements. Compared to this system, they may find the Proof of Stake-based network could be far cheaper to attack.

To solve this issue, the ethereum community introduced Casper protocol, a protocol which is set to find out bad players in the ecosystem and will abruptly help them to lose their deposit. These bad players are validated by a set of rules which are called Slashing conditions. Slashing conditions helps the ecosystem to be free from malicious attacks.

By doing this, the Proof of Stake system improves the chances of forgers getting into the validators pool and provides a fair amount of competition to the network.

So let’s see about how the Blockchain can be improved by using the Proof of Stake system in my next episode.

All of that being said… That’s it for today…

And, before signing off, I’d like to inform you that I’m gonna run a series of episodes on the Blockchain Technology so please feel free to drop your reviews and feedback so that I’d be able to organize my content.

Hope you had some great fun. See you soon. Until then signing of Somesh. Have a great day ahead! Cheers.