What is Proof of Stake

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Although cryptocurrencies have not been able to return to their record levels recorded at the end of 2017 for a long time, they still do not lose their popularity. One of the basic issues related to them is their mining. It’s an activity that takes place on the blockchain network. It, in turn, is a record of all transactions carried out in this network, for example with a given cryptocurrency.

The purpose of mining is for multiple users to agree on the current state of the blockchain together, even though they do not trust each other or any central authority. The first and basic consensus algorithm in the public blockchain network was Proof of Work. In 2011, an alternative – Proof of Stake was presented on one of the Bitcoin forums .

What is Proof of Stake?

Proof of Stake is the most popular alternative to the expensive, energy-intensive and problematic Proof of Work consensus algorithm. PoS selects the owner of a new block based on the stake / assets owned. Miners are rewarded with cryptocurrencies based on their rate. The more coins you have mined in the past, the more you get when you dig another coin using this protocol. In this method, cryptocurrencies are generated just for their possession, so to start mining you must have a given coin in the attached wallet.

In order to avoid a situation where someone has a monopoly on a given cryptocurrency (he has the most of it, so he automatically creates block by block and receives rewards), not only the number of coins held, but also their age is taken into account. The selecting algorithm creates the next block based on the combination these two factors (so-called determinants) and pure randomness.

It has been said for many months that one of the most popular cryptocurrencies – Ethereum with the 2.0 update is to move from the Proof of Work consensus algorithm to the Proof of Stake, and such an event should significantly affect the entire cryptocurrency market. It is supposed to take place in the second half of this year, but many experts are skeptical about this and suggest that we will wait much longer for the update.

Advantages of Proof of Stake

The biggest advantage of Proof of Stake is the power saving compared to the extremely energy-consuming Proof of Work. It is an ecological solution, cheaper to maintain and practically everyone, regardless of their power resources, can mine cryptocurrencies in this way.

Additionally, the lower amount of energy resources required makes the network more decentralized. There is no longer any need for mining pools as is the case with Proof of Work.

Moreover, unlike Proof of Work, PoS is also resistant to 51% attacks. His attempts in this case are very unprofitable for the attackers, because they would first have to get 51% of the supply of a given blockchain network .

Overall, the security issue in this consensus algorithm is perfectly designed. Due to the adopted assumptions, reliable work brings only benefits, and attempts to fraud only bring harm. If the system detects a fraudulent transaction, the miner node concerned loses part of its blocked rate and the right to operate on this network in the future. So, in any situation where the stakes are higher than the prize, the scams pay off.

Disadvantages Proof of Stake

Unfortunately, this algorithm is also not an ideal solution. First, despite the random combination system, the increased monopoly risk still exists if one has a lot of coins that are more than 30 days old.

Moreover, dividing ( fork ) chain is not as expensive as in the case Proof of work, so in this consensus algorithm is a fairly common phenomenon.

Proof of Stake further discourages cryptocurrency trading. Everyone is reluctant to get rid of them, since the more they have, the more they can get.

Summary

The Proof of Stake consensus algorithm is a very interesting solution and it seems that cryptocurrency experts still do not fully appreciate it. In the future, it should only gain in importance and enable every individual willing miner to mine coins. It is worth remembering, however, that the cryptocurrency industry and blockchain technology are developing at a dizzying pace and new revolutionary consensus algorithms may appear soon.