Proof-Of-Stake (POS) consensus algorithm: how it works and why it is so popular?

Why and how appeared Proof-OF-STAKE?

When developing blockchain architecture, which is a decentralized protocol for transfers with a constantly updated database, two key questions arise:

• to whom and by what principle to provide the right to generate new blocks;
• how transactions will be approved to ensure protection against double expenses and other abuses.

The solution of these issues led to several consensus mechanisms, that is, sets of rules by which participants in the decentralized network agree on how exactly transactions can be approved and included in new blocks.

The creator of Bitcoin Satoshi Nakamoto in October 2008 in White Paper the first cryptocurrency proposed the Proof-OF-WORK mechanism (“proof of work”).

According to POW, the NOD operators of a decentralized network (miners) in free competition solve resource -intensive mathematical problems – the search for the hash of the block by selection. If successful, the winner miner or pool gets the opportunity to add the found block, and in return receives a reward – new bitcoins.

A couple of years after the launch of Bitcoin, it became clear that the principle of operation Proof-OF-Work leads to a constant growth of mining power, therefore, the cost of electricity. In addition, due to the need to use powerful equipment, mining was reduced.

July 11, 2011, at the then popular Bitcointalk forum, the idea of ​​an alternative consensus mechanism for Bitcoin, which was called Proof-OF-Stake, or “proof of the share of ownership”, was proposed.

It was proposed that all its participants should receive the right to vote in a decentralized network in accordance with what shares of the total number of coins they own.

Already in August 2012, this new consensus mechanism received the first practical embodiment in Ppcoin cryptocurrency. New coins were distributed through mining, and any node that stored the PPC cryptocurrency could process transactions. The same hybrid consensus scheme was used in other early POS projects, for example in Gridcoin and Blackcoin. The first “clean” pos-criticism without mining was the NXT blockchain launched on November 24, 2013.

The mechanism of consensus Proof-OF-STAK was so successful and flexible that in subsequent years it was introduced in hundreds of cryptocurrencies in different versions and modifications.

The principle of operation Proof-OF-STAKE

According to the initial concept of Proof-OF-STAK, the right to manage the blockchain is granted to all its participants in accordance with the shares of the coins with which they own.

For example, in the NXT cryptocurrency with its “canonical” POS mechanism, a chance to form another block has all users who have at the official NXT Client wallet at least 1002 NXT during the last 1440 blocks. At the same time, each wallet is actually a full knot (node) and stores its own copy of the blockchain. Such a wallet can be launched both on a high -performance server and on a laptop, a Raspberry Pi microcomputer and even in a cloud service.

The more coins in the NXT wallet, the more likely it is that he will receive the right to form a new block, and then the user will get all the commissions for transactions that fell into this block. In an ideal case, a wallet that owns 1% coins will form 1% of all new blocks.

The process of creating blocks in NXT and other early POS Criticals is called “FORDGING” (T.e. “Forging), but to date, this term is rarely used.

The process of holding cryptocurrency in the wallet to receive remuneration for participating in ensuring the security of the network is called “staying”. Today, in many POS criticizes, sending coins to staining involves their blocking in a special smart contract with the impossibility of moving for a certain time, from several hours to several weeks.

How delegation of coins affected POS performance

Using the Proof-OF-STAK mechanism, when almost any cryptocurrency holder can achieve a high level of decentralization and blockchain security by a manufacturer of blocks. However, according to the trilles of the blockchain, while you have to sacrifice performance. In the mentioned NXT cryptocurrency network, the throughput is only 4 transactions per second, which is noticeably lower than many cryptocurrencies using Pow consensus. For example, Dogecoin processes 33 transactions per second.

To find a compromise between decentralization and performance, they proposed a concept of delegation, when coins along with many wallets, along with the right to vote, can be transmitted to few computing nodam.

In 2013, Daniel Larimer, an American programmer and crypto entrepreneur, used this concept to create the Delegated Proof-Of-Stake (DPOS) mechanism. It was first implemented in the BitShares blockchain platform, and then in different versions it is embodied in the most famous crypto projects EOS, Cardano, Tezos, and T.P. Today, the delegation function has become an industry standard and is used in almost all POS implementations.

In DPOS, cryptocurrency owners may not participate in the operation of the network themselves, but to transfer their coins to validators – professional participants managing blockchain nods. In return, they undertake to accrue awards to owners of coins, often – minus a small commission.

In different blockchains, depending on their architecture, the number of validators participating in the production of blocks is significantly different:

• Polkadot – up to 16;
• BNB Chain and EOS – 21;
• NEAR – 100;
• Cardano – about 3200;
• Avalanche – about 1200;
• SOLANA – more than 3400.
• Ethereum – more than 400 thousand.

As a rule, special equipment with constant Internet access is required to launch the validator, as well as a significant amount of native network coins. For example, the validator in the Ethereum network should have at least 32 ETH, and the Tezos validator should have at least 8000 XTZ.

Proof-OF-STAKE and Steering

To compensate for the costs of computing nodes for checking transactions and generating new blocks in most POS blockchains, a remuneration is provided, which is paid in the native coins of this network. As a rule, its size for each block is fixed, but can vary depending on the current network parameters.

For example, in the TRON blockchain platform, the representative (as the validator is called in this case), which generated the next block and processed the transaction, receives 32 TRX. He shares part of this amount with users who put their TRX in the staining and thus voted for it.

The yield of stakeing for validators and coin holders is determined by two factors:

• the rate of emission, which is determined by the fixed value of coins issued for each new block;
• a share of coins in the circulation that are blocked in stakeing ratio;

For example, if 1 million coins are produced through staying per year with a total sentence of 100 million coins, then the profitability of stakeing with 50% blocked coins will be 2% per annum. If 25% of the sentence is blocked in stakeing, then profitability doubles, up to Celsius Network 4% per annum.

What varieties Proof-OF-Stake exist

On the principles of POS and delegation, many consensus mechanisms have been developed that differ by a number of nuances, for example, the distribution of roles between participants in a decentralized network.

Here are some of them:

• Leed Proof-Of-Stake (Lpos, “Rent evidence of the share”) – Used in the Waves blockchain, where users for reward rent their coins for rent to the validator;
• Nominated Proof-Of-Stake (NPOS, “Nominated evidence of the share”) – It is used in the Polkadot blockchain platform and suggests the presence of the so-called nominators that bring the pledges for the validators and are responsible for their good faith;
• Pure Proof-Of-Stake (Ppos, “pure evidence of the share”) – is used in Algorand, where the validators of the next block secretly and randomly select among all wallets with a balance of more than 1 Algo;
• Effective Proof-Of-Stake (EPOS, “Effective evidence of the share”) – It is used in the Harmony blockchain platform. It has a special mechanism for the distribution of remuneration, encouraging many small validators instead of a small number of large ones, which stimulates decentralization;
• Proof-OF-Abority (POA)– A hybrid algorithm that combines the evidence of the share and the reputation of the validators, each of which should be approved by the developers. In the POA, the validator must undergo a personality verification procedure, similar to KYC. This algorithm uses BNB Chain.

Is the transition to Proof-OF-STAKE Bitcoin and other cryptocurrencies possible?

High energy consumption of cryptocurrency mining working at the POW algorithm has been the subject of criticism for many years. According to recent studies of the Cambridge Center for Alternative Finance, Bitcoin mining is responsible for the release of 0.1% of all anthropogenic carbon dioxide.

It was this factor that became one of the main arguments while trying to ban mining in different countries. So, by the end of 2021, cryptocurrency mining was banned in China. In March 2022, the European Parliament issued the question of a ban on cryptocurrencies to the vote. Although the bill was not supported, he outlined the tendency to squeeze the Pow from the legal field.

After the successful transition of the Ethereum network to the consensus of Proof-OF-Stake on September 15, 2022, the power consumption of the network decreased by almost 2000 times or by 99.95%. In this regard, the discussion of the transition of popular Pow creampecks to POS has unfolded with renewed vigor.

Back in December 2021, Dogecoin meme developers announced its imminent transition to the Proof-Of-Stake algorithm. Vitalik Buterin, co -founder of Ethereum decided to help them in this process.

Electric Coin Company, an anonymous cryptocurrency developer ZCASH, also discusses with the community the prospects for the transition to POS. According to the founder of the company Zuko Wilkox, this will not only increase the safety and energy efficiency of the blockchain, but also help attract the owners of ZEC to control the protocol.

The greatest doubts are possible to switch to POS in the case of bitcoin.

First, the first cryptocurrency does not have a single developer. Several independent groups of developers are discussing all alleged innovations, so even the introduction of even the most insignificant of them causes fierce disputes and takes years.

Secondly, the transition to POS will not support mining pools, which threatens this step with loss of income. It is noteworthy that back in 2020, a group of developers launched the Fork Bitcoinpos, which simply ignored the crypto community.

In turn, Pow supporters indicate a greater level of safety of this algorithm: with the current, extremely high level of decentralization of the bitcoin network, it is practically invulnerable to external attacks.