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Proof of Stake

Proof of Stake is one of the commonly used consensus protocols within blockchain technology. In this part of the Academy we will examine exactly what a stake is and how the algorithm successfully achieves consensus between nodes.

Proof of stake is the consensus algorithm used by cryptocurrencies to validate blocks. The system was initially suggested in 2011 and the first cryptocurrency to implement it was Peercoin in 2012. The main advantages of proof of stake are energy efficiency and security. 

In a proof of stake system, the creator of the next block is determined by a randomized system that is, in part, dictated by how much of that cryptocurrency a user is holding or, in some cases, how long they have been holding that particular currency. Instead of computational power, as is the case in proof of work, the probability of creating a block and receiving the associated rewards is proportional to a user’s holding of the underlining token or cryptocurrency on the network.

If a set of potential validators was made up of Adam, who is holding 40 tokens, Fil with 30, Tomek with 20 and Daniel with 10, there will be a 40% chance of Adam being chosen to validate the block and Daniel 10%, with Tomek and Fil on 20% and 30% respectively.

The randomization in a proof of stake system prevents centralization, otherwise the richest individual in the system would always be creating the next block and consistently increasing their wealth and as a result their control of the system. The main advantage of proof of stake, over a system such as proof of work, is that it uses considerably less energy and as a result is more cost effective. It is well documented that each Bitcoin transaction, which uses a proof of work system, can require as much electricity as an average Dutch household does in two weeks. This is both ineffective and unsustainable. 

In that regard proof of stake can be regarded as a superior consensus protocol as it requires far less electricity to run. Furthermore, as the proof of stake system is so much more cost effective there is less of a need to release too many new coins as a means of incentivizing miners to maintain the network. This helps to keep the price of a particular coin more stable.

Proof of stake protocol is effective in not only encouraging individuals to partake in the system but also preventing any individual from controlling the network. In order to carry out a 51% attack an individual or group would need to own the majority of coins on the network

Firstly, it would be extremely expensive to acquire enough coins to get anywhere near doing so since many individuals would likely exit the currency if a single party began buying everything, while others would ramp up the price to discourage a hostile takeover. Furthermore, it would be completely counterproductive to attack the network as it would vastly decrease the value of the coins that the attacker is holding. Essentially, the users with the highest stake in a cryptocurrency have the most interest maintaining and securing the network because any attacks would diminish the reputation and price of the cryptocurrency that they hold.

However, proof of stake does have its downsides, one of them being a “nothing at stake” problem. The issue occurs in the event of a consensus failure when block-generators have nothing to lose by supporting varying blockchain histories, preventing the conflict from resolving.

The proof of stake consensus is particularly suited to resolving the issue of Byzantine Fault Tolerance as all validators are tracked by the network and have known identities, for example in the form of a Lisk wallet address. As Byzantine Fault Tolerance requires 2/3 of validators to be honest, keeping track of these individual identities helps maintain a functional status quo.

Overall, the proof of stake consensus protocol is a robust system that effectively and efficiently fulfills its intended purpose. However, this has not stopped companies from modifying and improving the protocol, an example of this being Delegated Proof of Stake, otherwise known as DPoS.