What is Proof of Stake (PoS)

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Proof of Stake (PoS) or Proof of Participation, is a consensus protocol created to replace the well-known Proof of Work, providing better security and scalability to the networks that implement it.

The Proof of Participation is one of the two most widely used consensus protocols in blockchain technology. Today ICO Listing Online will help you understand this topic easily. Its English name is Proof of Stake. From there derive the acronym PoS, with which it is commonly known. The objective of this algorithm, as in PoW, is to create consensus among all the parts that make up the network.

Nodes that mine in PoS are called validators. The decision on which node to validate a block is made randomly but giving greater probability to those who meet a series of criteria. Among these criteria we can mention the amount of currency reserved and the time of participation in the network, but others can be defined. Once established, the process of selecting nodes begins at random. Once the selection process is finished, the chosen nodes will be able to validate transactions or create new blocks.

This reveals that Proof of Stake is a completely different process from the well-known Proof of Work (PoW) protocol. Where each of its nodes does hard computational work to solve cryptographic puzzles. This means that PoW, unlike PoS, requires large amounts of energy and specialized equipment to perform its operations. In PoS, by contrast, this is not necessary. In PoS the process is much simpler and energy friendly. These are the reasons why many blockchain projects are currently interested in this new protocol.

The first currency to use this protocol was PeerCoin in 2012. Then other projects appeared like NXT and Bitshares that also use this protocol.

Why was the Proof of Participation created?

The Proof of Stake protocol was created by the renowned developer Sunny King, in 2011. In 2012 King formally presented the PPCoin whitepaper, where he made it clear how the PoS algorithm worked. The objective was to solve some known PoW protocol problems. Among them the following stand out:

  1. Lack of scalability and speed. The mining process adds a high level of latency in order to approve transactions and produce new blocks. However, PoS avoids this situation. In blockchains that use the PoS protocol, verifications are performed by nodes with high currency holdings. In this way, verifications are made quickly, positively impacting the scalability and speed of the network.
  1. The high energy consumption of the mining process. The PoW mining process requires high computing power. A power that generally comes from machines with a high consumption of electricity. But PoS radically changes this view. Change the mining process for a participation process. A share reflected in the holding of coins or time within the network.
  1. The decentralization of the network. This is a problem that strongly affects PoW networks today. A fact that becomes increasingly palpable, especially when seeing large mining groups. A situation that centralizes the network in the hands of a few. PoS seeks to solve this, diversifying and democratizing the access to the participants in the different tasks of the network.
  1. Subtract financial interest from 51% attacks. Attacks of 51% are one of the concurrent fears in PoW networks. It is enough that a malicious mining group has 51% of the computing power of the network for the disaster. Well, with that capacity, the mining group can manipulate the blockchain at will. But in a PoS system, this is only possible if the attacker owns 51% of all coins. If the attacker makes such an attack, the value of the coin tends to drop. Which leads to very large economic losses for the attacker. This situation serves as a deterrent to prevent these attacks, while maintaining network security.

How does the Proof of Participation work?

The operation of the Proof of Participation protocol is quite particular. This system seeks to incentivize participants to have a certain amount of coins at all times. The possession of coins allows them to be chosen by the random selection process that is carried out to designate tasks. Under this scheme, those who have more reserves have greater weight in the network and greater opportunities to be elected. Once chosen they can validate transactions and create new blocks within the network. Allowing them to receive earnings and incentives for the work done.

PoS protocol example

A simpler way to explain this process would be the following example:

Imagine that you are part of a network of 100 investors. From that network, a first group of 50 investors own 1,000 coins each. Another group of 30 investors holds 2,500 coins each. And a last group of 20 investors, they own 10,000 coins each. In the following table, you can see the data of each of the mentioned groups and their weight of participation in the network.

In this way, it is clearly seen that Group C is the one with the largest participation in the network. A total of 61.54% and 200,000 coins to be exact. Now, it is time to carry out the process of random selection in the network. This means that those who are in Group C are more likely to be selected. But not only they are selected. Members of Groups A and B also participate. This is done in order to democratize and decentralize the network.

Greater tenure does not guarantee selection as a node, but it does provide greater opportunities. With this, it is sought that all those who are within the network benefit without suffering detriments. Additionally, any of the investors in Groups A and B can invest more to increase their level of participation. Once selected, investors have the ability to perform the tasks that are allowed. Investors perform these tasks in order to receive incentives and earnings proportional to their participation in the system. After the round, the selection process is restarted so that other investors can participate.

In addition to this, funds used as holding cannot be used and must be locked within the blockchain. This ensures that the funds will always be available as a guarantee from the validating node. However, the node can add new funds at any time, in order to further increase its level of participation.

PoS Features

The Proof of Stake (PoS) protocol has a wide variety and powerful features, among which we can mention:

  • It is a more environmentally friendly technology. This is because you do not need powerful machines for mining activities. Which means that its energy consumption is low.
  • It allows a better alignment of objectives and incentives among the members of the network. In this way, each of those who are part of the network seek to maintain that network for a long period of time.
  • It improves decentralization and democratizes access to the network. This is because everyone can participate in the network, as long as they meet their participation quota. In PoS networks, the concepts of mining and the equipment that this task entails do not apply. What avoids the concentration of power in a few hands due to how expensive its activity can be.
  • The delivery of rewards is more proportional. This thanks to the system of random selection within the network, which aims to assign tasks to those who have currency. Those who have greater possession have a greater chance of being elected, of verifying and receiving profits from it.
  • Network security is much greater. This is thanks to the fact that it solves or hinders certain already known attack schemes, such as the 51% attack.
  • Offers greater scalability. This is wielded as one of its main characteristics. The speed and scalability of PoS networks far surpasses PoW networks. This is because it does not do any intensive computational work that is time consuming. This makes PoS perfect for blockchains that want to be used as retail payment systems, where it is required to verify a large number of transactions per second.
  • There is a risk of losing funds due to malicious attacks. PoS systems require that the user’s portfolio is always open and connected to the Internet. This creates a security issue that may allow hackers to exploit vulnerabilities to steal funds from such wallets. One more reason to follow common security criteria when using this system.