What is Proof of Stake?
September 09, 2019
Proof of Stake (PoS) is one of the most popular consensus algorithms, which is nowadays used by many successful crypto projects. It is the mechanism that enables the creation of new blocks and governance on a specific blockchain by assigning particular people to validate the blocks and get rewards for it.
What is the Consensus Algorithm?
Consensus Algorithm is a special procedure through which a particular blockchain reaches agreement on any proposed modification or the way of new blocks’ creation. Decentralized (public) blockchains are built as distributed systems, i.e., if you want to send or/and receive crypto from someone you don’t need to engage third-party service in the process (Visa, Mastercard, PayPal, etc.).
In the case of proof of stake algorithm, it works also on the connection between unknown peers in a dispersed network of the system users. The mechanism verifies the transactions, spreading the information between all the nodes in the blockchain. It ensures that the transactions occur in a trustless way, and each newly added block is a trustworthy one.
Why was PoS created?
Shortly, this paragraph will describe the dilemma ‘Proof of Work vs Proof of Stake.
Proof of Stake (PoW) was first depicted in 2009 at a Bitcointalk post as an alternative to Proof of Work (PoW) algorithm. The project aspired to unravel and fix the principle weaknesses of Proof of Work.
Even if the PoS and PoW have goals alike, the roots of the two mechanisms have fundamental differences, especially when it comes to the new blocks’ creation.
Briefly, the PoS consensus replaces the process of mining new blocks, which is used in the PoW, with the mechanism of validation. There the rights to adding new blocks are distributed between the participants according to their stake in the blockchain.
The validator of each block (also called forger, baker, or minter) is defined by a cryptocurrency’s investment amount but not the allocated computational power amount.
It has an advantage under the mining as the second one requires a lot of power to run diverse crypto calculations, unlock block by block of a particular currency. The processing force converts into a high stake of power and electricity.
In 2015, it was evaluated that one Bitcoin exchange required at least a whopping 1.57 American household electricity consumption per/day.
The Proof of Stake algorithm looks to address this issue by crediting mining capacity to the extent of coins held by a mine.
Many successful crypto projects use the PoW algorithm, but many of them are planning to change their system to the PoS soon.
How does PoS work?
Every PoS network can implement the algorithm in different ways; however, mainly blockchains are protected by a sort of random selection. This includes consideration of the node’s wealth, coins age (the time it’s being staked or locked), and the factor of randomization.
In more detail, the PoS validator is constrained to validate a level of coins according to their amount of money. For example, the one who claims to have 3% of all the Bitcoin can hypothetically validate only 3 % of the blocks. This implies that the more coin or altcoin is being claimed by the validator, the more validating force this person has got.
In the PoS consensus, the validator of another block is picked in a semi-arbitrary, two-step process. The main component to be considered in this choice procedure is a client’s stake. Each validator must own at least one stake in the system to be suitable for the mining process.
Staking includes storing a number of tokens in the framework, securing it in a sort of a virtual safe, and then utilizing it as a guarantee to go for another block of crypto.
The more a client stakes, the better their opportunity of being chosen since they’d have more money in the game. But acting maliciously can result in big losses, compared to those who stake less.
Benefits of Proof of Stake
In short, the advantages of the PoS in contrast with the opposed algorithms are security, reduced risk of centralization, and energy efficiency.
- No reason to spend huge amounts of power to verify a blockchain. For instance, It’s assessed that both Bitcoin and Ethereum consume over $1 million worth of power and equipment costs every day as a feature of their accord system.
- As a result of the absence of high power utilization, there isn’t as much need to issue the same number of new coins to persuade members to continue being interested in the system.
- The PoS mechanism is more open to a broader array of work methods. With the PoS, it’s challenging to build harmful ‘centralized cartels’ like selfish mining in PoW.
- Decreased centralization dangers as economies of scale are considerably less of an issue. $10 million coins will get you precisely ten times higher returns than $1 million coins, with no extra gains from the top-notch technology you can afford.
- Better chance to avoid varieties of 51% attacks by implying economic penalties – this more expensive to carry out in such a mechanism’s network.
Decentralized Proof of Stake (DPoS)
With the development of PoS consensus, there are taking place different modifications of the algorithm. The most known up-to-date is Decentralized Proof of Stake (DPoS). The DPoS system was created by Daniel Larimer, the blockchain engineer, as the next step after PoS. The two algorithms are quite similar, but there are differences in the block creation and the platform’s governance. The goal of the system is to increase the scalability and speed of the network drastically.
Currently, the blockchains adopted the DPoS mechanism are Eos, Ark, Lisk, Steem, and BitShares.
Best of Proof of Stake Assets
The software of Cosmos allows blockchains to transact in an ‘Internet of Blockchains’ with one another, i.e., it enables interoperability between a large number of other networks.
The profitable tool built on the Cosmos platform is a native token ATOM. It jumped at the $8.17 rate instantly after it was launched and depicted its ATH. ATOM’s expected yield is 7-11 %. Read this guide to know how to stake it in Atomic.
Tezos is a cryptocurrency that allows making a profit for the new blocks’ baking. It’s different from staking in the sense of the reward you give for.
While staking a coin, you simply are being rewarded for locking it up for a particular time, so the larger stake you have – the higher your passive income.
In the case of XTZ baking, the rewards are being formed for the bakers who bake new blocks. The yearly yield for XTZ baking – 4-7%.
Read this guide to know how to stake XTZ in Atomic.
Pundi-X’s value has been fluctuating due to the network’s collaboration with the other PoS companies, and now it is about to bring cryptocurrency payments to retail. The NPXS, native token, reached ATH of $0.004055 and a market cap of $363,499,888 in 2018. The token raised approx. 38% year-to-date. The expected yield for staking is 18.46%.
IOS Token (IOST)
IOS started as an ERC-20 token, is a blockchain with fast transaction processing, which was famous among gamers. Although, as a part of staking, it’s needed to vote for Node Partners on the IOST main net. The process is the same as general, though. Users earn rewards for validating and contributing to the computing power for the blockchain’s services. IOST’s expected yield is 14.71%. It’s up to 100% so far.
Waves is a high-performance blockchain with up to 6.1M throughputs per day. It’s vital in crypto-collectibles, which means updates can’t be accepted without 80% positive votes. The token WAVES reached an ATH with $15.98 and a market cap of $1,598,420,000 in 2017. The expected yield is 9.21%. Though, it’s dropping 60% year-to-date.
Qtum holders can expect average passive returns with minimal staking. Qtum staking also requires no base sum, which combined with the fact that blocks each are generated every couple of minutes, and are placed on 2×2 mode. Yearly passive income is $6 USD, and the current holding stake – $100.
Starting in 2016 as Antshares, the venture was inevitably rebranded to NEO and has since proceeded to contend as the best ten digital currency.
Just as airdrops, NEO holders are allowed free (GAS) only for holding their coins either in chilly stockpiling or in a suitable wallet. The yearly expected staking yield is 2.29%.
VeChain, with its native token VET, is a blockchain that targets to supply all its applications and provenance. It is year-to-date low is $0.004. However, according to the ATH of $0,019775 and a market cap of $1,085,620,706, VeChain’s expected yield is 4.61%. It is up 1,400% year-to-date.
Tron (TRX) is a PoS platform, which focus is on payments. Recently, TRX was even added to the Opera Browser as a supported currency. TRX reached its ATH on January 4, 2018, with $0.25 from $0.4. At the moment of writing, the TRX value is $0.1. Tron’s expected yield is 4.35%.
Cardano has recently announced the launch of the Shelley incentivized testnet with staking implementation. The token has already got hundreds of pools, with more than 2.6 billion ADA staked. The proof of stake rewards or yearly yield expected is 3.7%.
Eos is a blockchain with a DPoS algorithm that is known for its flexible utility and speed. The platform gathered 7.12 ETH ($4.1B) through the ICO process and has continued to raise the popularity and trust since that time.
According to the CCID Research Institute, EOS can be a top digital currency due to its innovation, application, and technology.
The ATH of $21.46 was reached on August 28, 2018. The expected EOS yield is 1.84%. It’s rising at 66.15% year-to-date.
Ethereum Proof of Stake
The proof of stake algorithm is rapidly gaining more and more popularity among blockchains. The most long-awaited news is Ethereum proof of stake.
The ETH blockchain is currently based on a Proof of Work algorithm. Still, according to the Ethereum Roadmap and Improvement Proposals (EIP), the shift towards the PoS consensus algorithm has begun, and it will be reached in the version Ethereum 2.0.
Vitalik Buterin, the Ethereum co-founder, stated that ‘after the proof of stake (PoS) consensus algorithm will be implemented in Ethereum’s blockchain, it would become more secure and costly to attack than Bitcoin.’ He specified that these changes would make Ethereum ‘the safer network of two’ during Devcon 5, ETH conference in Japan this year.
Ethereum Proof of Stake date is expected to be in the first quarter of 2020 on testnet and hopefully launched on the main net in the second quarter of next year.
All in all, the consensus algorithm’s primary role is in maintaining the security and integrity of a whole blockchain. Furthermore, scalability and solutions to other issues.
It seems that Proof Of Stake can retroactively replace the Proof Of Work algorithm soon.
At last, the ideal approach to test its security is to discharge it in the wild and understand how well it does the same job when compared to Proof of Work. With changing Ethereum and other platforms to Proof of Stake, we can say that the business pattern is going to end up progressively better both for the cryptomarket and the environment.