proof of stake

What means 'Proof of Stake'?

Proof of Stake (PoS) describes algorithmic consensus concept which let users (forgers) with more coins/tokens validating more transactions. The final goal is to reach distributed consensus through a process called weighted random picking. This means that the selection of the forger is determined by two main factors: randomness, age or wealth (stake). This is why the concept is named Proof of Stake (PoS) Another popular but different consensus concept used in Blockchains is Proof of Work (PoW).

History of 'Proof of Stake'

The reason why Sunny King and Scott Nadal developed a Proof of Stake concept in 2012 was the high energy consumption of Bitcoin using Proof of Work (PoW). In the Bitcoin network creators (miners) of the next blocks are evaluated through the availability of computing power. As a result specific powerful mining equipment, huge mining farms emerged all solving mathematical problems of the Bitcoin to earn as much Bitcoins as possible. The extreme energy consumption of Bitcoin is visible in the graphic below

Disadvantages of 'Proof of Stake'

Nevertheless, despite advantages and its overall reduction of energy consumption Proof of Stake is not free of defects. We identified 4 main issues.

  • The distribution – As PoS rewards staking of the coins/tokens, it is unclear who decides and regulates the initial distribution.
  • The monopolization – Individuals with big stakes will always get richer, while individuals with smaller stakes will relatively loose influence.
  • 51% attack – PoS could not vanish the 51% attack issue. If one person owns more than 51% of all stakes, it could manipulate the whole consensus concept.
  • Nothing at stake – If 2 forgers meet the criteria to validate a block at the same time a fork happens. This means that we have two identical, both valid blocks containing the same information. Then it could be that 99% of all forgers turns to both blocks, as they just want more fees. In this situation the 1% could double spend its stakes as it is able to add the transaction to both blocks.

Which projects use 'Proof of Stake'?

The currently most famous project using a PoS is Ethereum. But it is important to understand that PoS  is not standardized concept as every Blockchain does its own fine tuning, necessary to fit their needs.

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