What is Proof of Stake Consensus Algorithm?
By Rafał - 2019-08-14
Consensus protocols allow the blockchain to confirm transactions without relying on a third party. The decentralization remains the most important point in the creation of new algorithms: Getting rid of third parties and ensuring the maximum decentralization possible.
Historically, the blockchain technology arrived with the proof of work mechanism introduced with the arrival of Bitcoin and then a lot of other currencies until now. The computing power, or also named hash rate is used by miners to find new blocks and add them to the chain. The difficulty may change according to the code and only a certain number of blocks can be found in a specific period: In Bitcoin, for example, one block is produced every 10 minutes. The difficulty automatically adjusts to make that happen.
The problems that POS algorithms try to address
POW systems also arrived with few drawbacks related to new block creation:
High energy consumption
All the miners around the world test millions of computations possibilities per second in order to be able to find new blocks. Due to the amount of computational power required for this task, PoW is extremely costly and energy intensive. Recently, a study has shown that annual energy consumption for Bitcoin mining was higher than annual costs for some countries.
Proof of Work systems are vulnerable to a 51% attack, meaning that nefarious miners can own 51 percent of a network’s computing power, gaining the ability to manipulate the blockchain at their advantage, modifying the blockchain, producing new blocks and making double spending. With the mining pools like NiceHash and huge mining farms around the world owned by companies, POW systems are at risk. Bitcoin, however, is relatively safe with the power it would require to attack it. But the problem persists with low market capitalization coins who can be victims of nefarious attacks.
That’s why standard POS was created: to solve the problems related to mining rigs and resources consumption as well as reinforce the decentralization through a safe and secured consensus.
Over time, several variants of the POS have appeared, always bringing innovation to simplify the whole process.
Standard Proof of Stake (PoS)
A proof of stake system requires the user to show ownership of a certain number of cryptocurrency units. This means users must own a minimum amount of a specific currency in order to stake it.
In classic POS blockchains, the creator of a new block is chosen in a half random half logical way, depending on the user’s wealth, also defined as stake in the network. In this kind of systems, blocks are said to be forged or even minted but not mined. The reason behind is the technical aspect. No hardware like mining rigs is needed to solve new blocks so users who validate transactions in a POS consensus are called forgers.
In order to validate transactions and create new blocks, a forger or staker must first put their own coins at ‘stake’ directly in the specific coin’s wallet. Once the forger puts their stake up, they can directly participate in the validating process and create new blocks in order to receive rewards. Sometimes the amount received is fixed or is configured to be scalable over time to answer to a special use case. Transactions fees can or cannot be included in the stake rewards if the specifications and the code has been designed in this way.
Often, proof-of-work systems switch to proof of stake once a specific bloc height has been reached. This solution offers more scalability and sustainability over-time because it is less resources intensive than proof of work-based solutions.
The first currency to implement this system was Peercoin in 2012, with this vision:
Peercoin uses both the Proof-of-Work and Proof-of-Stake algorithms. The PoW algorithm is used to spread the distribution of new coins. Up to 99% of all Peercoins is created with PoW. Proof-of-Stake is used to secure the network: The chain with longest PoS coin age wins in case of a blockchain split-up.
Using a process where the selection of the forger would be related to the size of their account balance alone would result in a permanent advantage for the richer forgers who decide to stake a lot more. This would lead to complete centralization of the supply and create many issues. To counter this problem, unique methods of selection have been created and implemented. We can quote features such ‘Randomized Block Selection’ and the ‘Coin Age Based Selection’ which are used in a lot of modern crypto currencies.
Randomized block selection
In the randomized block selection method, a formula searching for the user with the combination of the lowest hash value and the size of their stake is used to select the next forger to receive the reward. With the underlying notion around blockchain, stakes are public , and it is therefore possible for the network to determine who will receive the next reward.
Coin Age based selection
The coin age-based system selects the next forger based on the coin age of the stake the potential forger has put up in its wallet. Coin age is calculated by multiplying the number of days the cryptocurrency coins have been held as stake by the number of coins that are being staked. The duration depends on coin specifications. Users who have staked and waited longer have a greater chance of being assigned to forge the next block. Once a user has forged a block, their coin age is reset to zero and then they must wait at least the same amount of time it took previously for the coins to be mature. This mechanism guarantees a fair and decentralized community. Peercoin as we previously quoted, is a proof-of-stake currency which uses the coin age selection process combined with the randomized selection method. Peercoin’s team already claimed that a malicious attack on the network is more difficult since acquiring more than half of the coins is likely costlier than reaching 51% of proof-of-work hashing power.
Proof of stake systems are more environmentally friendly and efficient, as the electricity and hardware costs are much lower than the costs associated with mining in a proof of work system. However, more variants came out to further improve the cost and energy efficiency brought with POS sytems.
What is DPOS? Delegated Proof of Stake
Delegated Proof of Stake (known as DPoS) is a consensus algorithm maintaining stability, validating transactions and acting as a form of digital democracy. It is the protocol of few known coins such as Lisk and Ark. Delegated proof of stake uses real-time voting combined with a social system of reputation to achieve consensus. Every token holder has a degree of influence about what happens on the network at any time and in the future.
Active delegates are voted into their roles by token holders. The voting power that the token holder has (voting weight) is determined by how many of the base token/coin the account is holding. It is important that the delegates are chosen with the best interest of the network as they keep the network running smoothly and safely. In some DPoS versions, a delegate needs to show commitment by depositing his funds into a time-locked security account to ensure its reliability. This version of DPoS is often referred to as deposit-based proof of stake. The principle of allocation is the same as standard POS. A set number of delegates forge new blocks every day and share the rewards with the coin holders. DPoS allows users to avoid leaving their computer on all the time and further reduces the energy consumption across the world. The rewards will be received directly on a daily basis (or more) and users only need to open their wallet once in a while to synchronize it. All the forging process is completely managed by the chosen delegate.
Leased Proof of stake (LPoS)
LPoS is an enhanced version of standard Proof-of-Stake used in the Waves ecosystem which keep the same principles as standard POS. In the LPoS systems, users can lease their balance to full nodes. With LPoS, the user will have the ability to lease WAVES from the wallet to different contractors which can pay a percentage as a reward. In a Leased Proof-of-Stake environment, users can choose between running a full node or leasing their stake to a full node with receiving rewards. This system allows anyone to participate in the Waves network maintenance and in its sustainability. User can lease his WAVES through leasing on any computer or mobile device that has an internet browser connected since Waves provides a lite client solution that does not require miners.
Advantages of this solution:
- Node operators can use the mining power to generate blocks even if the coins never actually leave users wallets.
- The users can discontinue leasing easily with a click and just wait for the cancel lease transaction to go through, Node operators may work with different efficiency and send back different percentage of income so rewards could vary.
The principle remains the same when users deposit their holdings on a staking pool. The “pool” is a huge stack composed of holdings from all the users who sent their coins. This solution is centralized as it requires to deposit on a third party site or online wallet but ensures bigger rewards everyday as the pool is composed of all combined accounts.
Anonymous Proof of Stake (ZPoS)
Users can stake zPIV just like normal PIV but also earn higher rewards while maximizing privacy and ease of use. With zPIV , staking block rewards are 50% larger than with regular PIV staking rewards.
PIVX, with the use of its Zerocoin protocol introduced ZPoS as a new way to stake anonymously. With newly minted Zerocoins (zPIV), track transactions through ‘timing’ is close to impossible. Each time a zPIV is staked, it will generate 4 new zPIV denominations including the original staked zPIV denomination amount plus 3 x 1 zPIV denominations that make up the 3 zPIV block reward. This means that there is the potential for the accumulators to have newly minted zPIV denominations every 60 seconds, without a user manually minting zPIV directly.
With that system, also known as “Stealth Staking”, no one is able to see how many coins a user (an address) is staking.
In short, several PoS types exist, further exploring the base vision introduced by Peercoin in 2012 and proposing new ways to innovate and simplify the staking process. The variants developed from basic POS improve the privacy for POS based systems and help users to earn rewards while staking and participating in the whole network stability. The different solutions guarantee a fair allocation of the rewards with the integrity of a decentralized consensus.