What is Proof of Stake?

The Proof of Stake consensus algorithm was introduced in 2011 at the Bitcointalk forum. It is designed to solve the problems of the current most popular operating algorithm – proof of employment (Proof of Work). While both algorithms have the same goal, which is to achieve consensus in the blockchain , the process for achieving the goal is quite different.

How does Proof of Stake work?

The algorithm uses a pseudo-random selection process in which a node (node) is selected to be the validator of the next block. This is based on a combination of factors that could include: how old the bet is, randomization and the value of the bet on the bet.

It should be borne in mind that in Proof of Stake systems, blocks are considered to be “forged” rather than ” excavated “. Cryptocurrencies using Proof of Stake often start with the sale of pre-forged coins or start with the Proof of Work algorithm and then move to proof of bet.

On Proof of Work systems, new horses are created as rewards for the diggers, while the proof of bet system usually uses transaction fees as a reward.

Consumers who wish to participate in the forging process are required to block a certain amount of horses in the net as their bet. The size of the bet determines the chances of choosing a node as the next validator to forge the next block. The bigger the bet, the better the odds. In order not to favor only the richest nodes in the network, different methods are used in the selection process.

The two most commonly used methods are Randomized Block Selection and Coin Age Selection.

In the block randomization method, validators are selected by searching for nodes with a combination of the lowest hash value and the highest bet. Since the size of the units is public, the next blacksmith can usually be foreseen by other participants.

The method of selection based on the age of the horses selected nodes according to the period during which the horses were laid. The age of the horses is calculated by multiplying the number of days the coins are held as a pledge and the number of horses placed. After the nod has forged a block, the age of the coins is reset and must wait a certain period of time to be able to mint another block. This does not allow high-stakes nodes to dominate the blockchain.

Each cryptocurrency that uses the Proof of Stake algorithm has its own set of rules and methods that unifies what the creators consider to be the best possible combination for its system and users.

When the forging block of the next block is selected, it will check that the block transactions are valid, sign the block and add it to the blockchain system. As a reward, the node receives the transaction fees recorded in the block.

If a node wants to cease to be a blacksmith, his bet together with the prizes won will be released after a certain period of time. This process gives the network time to make sure there are no counterfeit blocks added to the node blockchain.

Security

The pledge works as a financial motivator for the blacksmith, not to validate or create counterfeit transactions. If the network detects a counterfeit transaction, the blacksmith will lose some of its stake and the right to participate as a blacksmith in the future. While the stake is higher than the remuneration, the validator will lose more horses than he would win in the case of attempted fraud.

In order to effectively control the network and validate counterfeit transactions, one node must have a majority stake in the network, also known as a “51% attack”. Depending on the value of the cryptocurrency, this would be very impractical, as in order to gain control of the network, you will need to acquire 51% of the in circulation.

The main advantages of the Proof of Stake algorithm are energy efficiency and security.

An increasing number of users are encouraged to launch their nodes because it is easier and more accessible. Adding to the randomization process, this makes the network more decentralized, since extraction pools are no longer needed to dig blocks. Due to the smaller need to release too many new coins for a prize, the process helps the price of a coin stay more stable.

However, the cryptocurrency industry is rapidly changing and evolving. Today, there are other algorithms and methods that are being developed and experimented with.