In 2011, a new technique was proposed which came to be known as Proof of Stake. This technique works as an alternative to Proof of Work. The idea was that it was extremely wasteful to let everyone compete against each other with mining. Proof of Stake or PoS is the most common alternative consensus mechanism to PoW and overcomes the disadvantage of the requirement of high computational energy, high infrastructure cost, and aggressive competition in the PoW mechanism. The mining mechanism is completely replaced with a different approach of providing the opportunity to create the block in the blockchain, based on the stake the user holds in the blockchain system. This stake is usually defined based on the ownership of the digital currency operating in the blockchain. Although the choice of selection of block creator is random, it is proportional to the percent of ownership of the stake in comparison to the stake of the system.
Proof of Stake works on an election process. 1 node is selected to validate the next block. In POS, there are no Miner or Mining. Instead, there are Validators, and they either Mint or Forge.
The selection of the Validator is not completely random. A peer has to deposit a certain amount of coins into the network like a security deposit, as a Stake. For example, if A has 20% of the stake, B has 31%, C has 18%, D has 9%, and E has 22%, and there are 100 blocks to create, A will create 20 blocks., B – 31, C – 18, D – 9, and E – 22. The order of the opportunity provided to them to generate the 1st to 100th block will be entirely random. Although the mechanism is less secure than PoW, the energy consumed to provide consensus is assuredly very low.
The size of the Stake determines the chances of a validator to be chosen to forge the new block. For example. M deposits $10 whereas, Z deposits $100. The chances or Z being chosen as a validator are higher. Here, the peer chosen validates the next block by checking if all the transactions within it are valid. Once it’s validated, he signs off on the block and adds it to the Blockchain. The node then receives fees associated with the transaction in the block. But Proof of Stake doesn’t come without its own risks and disadvantages.
In POS, how they select their validator can’t be completely random as the size of the stake has to be considered. The stake alone isn’t enough as it will favor rich people who will get chosen more frequently and will also collect more transaction fees. This will make them richer and increase their stakes and chances of being chosen as a validator continuously. an additional element adds the distribution process which makes the validator-selection process semi-random, although the way in which this is done differs from blockchain to blockchain. The two most commonly used methods to add randomization are Randomised Block Selection and Coin Age Selection.
Proof of Stake is similar to depositing money in a bank, where interest is given based on the amount and duration it is held. It is utilized by Cryptocurrency by allocating token based on Coin Age. Coin Age is the quantity and duration tokens are held for.
For example, 100 tokens held for 20 days is 2000 Coin Age.
Coins must have been held for a minimum of 30 days before they can compete for a block. Users who have staked older and larger sets of coins have a greater chance of being assigned to forge the next block. Once a user has forged a block, their coin age is reset to zero and then they must wait at least 30 days again before they can sign another block. The user is assigned to forge the next block within a maximum period of 90 days, this prevents users with very old and large stakes from dominating the blockchain thereby making the network more secure.
Trust is developed by the validators on the network by the means of the Stake. Validators deposit a stake and can lose it if they validate fraudulent transactions. If the stake is higher than the amount they would receive from the transaction fees, they can be trusted to do their job; as they would lose more money if not. It acts as a financial motivator. If a peer stops being a validator, their stake and transaction fees are held back for a certain period of time in case they need to be punished by the network for validating a fraudulent transaction. There is also the risk of a chosen validator not doing the job he is appointed to do, but this can be solved by appointing backup validators.
As POS does not require expensive mining equipment and does not compete against other miners’ computing power, it saves on both money and electricity. This also encourages more people to set up a node, but only a few elected validators can verify a block, making the system more decentralized and secure.
There are also fewer chances of a 51% attack as POS makes it hard and impractical to acquire that amount depending on the value of a cryptocurrency. But we see in the current scenario, large mining pools are reaching to achieve more than 51% of the power on a blockchain. Exchanges that provide staking services hold such a large amount of tokens in a single wallet which gives them the power on the blockchain which takes the ecosystem away from the ethics of decentralization. When a bitcoin is converted to Proof of Stake, acquiring 51% of coins would lead to a loss of many billion dollars.
This is only a general guide to the proof of stake system. Each cryptocurrency issuer on a blockchain customizes this system with a unique set of rules and provisions as the ambition of dealing with the scalability problem of the cryptocurrencies still stays. Additionally, this is a rapidly evolving industry, and apart from proof of work and proof of stake, there are currently several other systems and methodologies of transaction verification and block creation being tested and experimented with.