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PROOF OF STAKE EXPLAINED

Proof of stake

April 28, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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Proof of stake in the blockchain is a mechanism for determining who can add or validate new blocks in the blockchain. Both proof of stake and proof work are consensus mechanisms that address the double-spending of digital currencies.

The basics

Blockchain is a database whereby users create blocks of information secured by a network of decentralized nodes. Because it is decentralized, there is no one or authority to decide whether any new information is correct and should be added to the network. But still, online currencies have to keep track of how many coins each user has, who they pay and how they spend it.

If there was a way a cryptocurrency user would spend their coins more than a single time, it would compromise the entire system meaning that the digital currency would be worthless.

Initially, the answer to the problem of double-spending was outlined by Satoshi Nakamoto (the pseudonymous person who invented bitcoin) in the bitcoin whitepaper as proof of work to validate blockchains in the blockchain. According to the bitcoin whitepaper, the power of adding new blocks to the blockchain is given to miners who use their computational power to solve cryptographic puzzles. 

The problem with proof of work is that it requires enormous amounts of energy to support the network's security. An alternative mechanism has emerged to address that problem, and that is proof of stake.

The inception of proof of stake

Scott Nadal and Sunny King introduced the concept of proof of stake in 2012, and in 2013, Peercoin blockchain first adopted it. Peercoin was one of the first cryptocurrencies trying to address the downsides of bitcoin, and for a while, it was perceived as its competitor. It initially used PoW but later migrated to a combination of PoW and PoS because mining Peercoins got less attractive. The users could switch to minting (producing coins by staking their coins in the network rather than solving puzzles for rewards).

Proof of stake would increasingly gain supporters because, after Peercoin, Ntx introduced pure proof of stake in 2013, followed by Blackcoin in 2014. Following that, proof of stake evolved into different forms, including delegated proof of stake and leased proof of stake. Currently, there are several cryptocurrencies using proof of stake as consensus mechanisms, including Cardano, Polkadot, and Tezos, while users are anticipating Etherium's migration to PoS.

The idea behind proof of stake

The principle behind proof of stake is to make miners stake some of their cryptocurrencies as the entry point for adding new blocks to the chain and earning transaction fees. The penalty for malicious actions such as adding invalid transactions to the blockchain ledger would be slashing, whereby the network takes some or all the amount of staked coins.

The purpose of staking is to prove that you are interested in the welfare of the cryptocurrency you are mining. So, before you mine the cryptocurrency, you have to stake some of it during the process. Showing you own some of it and sell it is not enough since the stacked coins are locked during the mining.

Here, a miner, also known as a validator, has to be selected to add new transactions to the blockchain. The selection criteria differ from one cryptocurrency to another. The selected miner creates and adds a new block of transactions and collects all the transaction fees from the new block.

However, with proof of stake cryptocurrencies, only fewer block rewards are won since many of the coins issued are usually pre-mined upfront before the currency's genesis block. That there are fewer mining rewards apart from the transaction fees and less work required to mine proof of stake crypto has given rise to the term minting used to refer to such a process instead of mining.

Proof of stake selections

As earlier mentioned, in PoS, a miner has to be selected to add a transaction to the blockchain. To be chosen, a miner has to stake to play the game. They need to have some of the cryptocurrency in their wallet. Some require it to have been there for a certain amount of time. For instance, Peercoin requires that the currency has been sitting in the wallet for a minimum of 30days. 

In some PoS systems, the staked coins are locked in the wallet for a specified amount of time, while in others, having the currency in the wallet is enough to count as a stake. Others use the concept of coinage, multiplying the number of coins in the wallet with the number of days they have been sitting there. For example, a miner who has 10 coins sitting for 60 days has 10x60=600 coinage, a better chance of being selected than a miner with 5 coins sitting for 90days which is 5x30=450 coinage.

Again, the clock is restarted for the miner who wins, meaning they can't use the coins for another 30 days. Even after that, the stake is not enough because the richest miner would always win and would be selected to add the block to the blockchain every time. 

PoS cryptocurrencies use randomization as well. The staked coins or the coinage of the miner's stake determines if they get the ticket to play the game, but the selection has to be random. Generally, the more coins a miner has, the higher their chances of being selected, although it happens randomly because even a miner with a fraction of their stake can win. 

CONCLUSION

The outstanding thing about proof of stake is that less computational power is needed. It can be possible on any computer running the crypto's node software if the miner stakes an adequate amount of cryptocurrencies. Another catch is that the blocks rewarded are proportional to the amount of staked coins providing less even coin distribution among miners than proof of work blockchains.

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