Proof of stake is a protocol designed to reach distributed consensus without the need for an ‘energy-intensive’ mining process. It is used by cryptocurrencies to validate and append transactions in the blockchain and also generate new coins in circulation. The nodes on the PoS network are staked by ‘forgers’ or ‘minters’. Proof of Stake was developed as an alternative to Proof of Work (PoW) (what is Proof of Work?) which is an energy-intensive process which involves setting up GPUs or ASIC miners globally to ensure distributed consensus.
The concept of nodes is important here because unlike miners which are sometimes also called ‘nodes’ in the blockchain, the node in PoS is a server which validates the transactions on the network. The percentage of coins that each node holds determines the reward for that node. In Proof of Stake (PoS), the coins are ‘forged’ or ‘minted’ not mined as on the PoW protocol.
When a transaction is sent across a PoS network, the coins in circulation are forged by the nodes when they validate and confirm the transactions. Forging involves creating a duplicate copy of the coins, it is also the process by which new coins are ‘minted’, as cryptocurrency tokens are all fungible it is the process of generating new coins. PoS algorithms are designed to reward these newly minted coins to the forgers or nodes according to their stake in the network. The nodes which process a malicious block or transaction can be voted-out or boycotted by the other nodes as well. Peercoin, Nxt and Ardor are some of the most popular and oldest cryptocurrencies to incorporate the PoS algorithm.
Advantages and Drawbacks of PoS
Proof of Stake is an environmentally friendly algorithm, the economy and generation process are intertwined in an intelligent way to ensure distributed consensus. The nodes on a PoS Blockchain would require nothing more than a small IC or Raspberi Pi running a small application. The PoS system is so energy efficient that a node can be powered by a USB port alone.
The Proof of Stake (PoS) system also has some drawbacks that have to be meticulously deterred by the developing team to ensure fair economic activity on the blockchain. The most popular and possible of those is the 51% attack. This happens when an individual stakeholder acquires more than 50% of the tokens in circulation, this gives the individual centralized power over the network. The stakeholder can vote to mutate the blockchain according to his whim having majority control over the network.
PoS, the future of Ethereuem
Ethereuem is the most popular smart contract development platform. The distribution of Ether Tokens is also wide-spread enough to ensure decentralisation. The network has outlined a new design and has determined to shift from Proof of Work (PoW) to Proof of Stake (PoS) network to compete with the more advanced EOS, Cardano and Tron. With the help of PoS, these networks provide almost instantaneous and zero fees transactions.