Proof of Stake (PoS)

0x Protocol

What is proof of participation (PoS)?

The concept of proof of participation (PoS) stipulates that a person can extract or validate bulk transactions depending on the number of coins they hold. This means that the more Bitcoin or altcoin a miner has, the more mining power he has.

Key points to remember

  • With Proof of Stake (POS), Bitcoin miners can mine or validate block transactions depending on the amount of Bitcoin a miner has.
  • Proof of Stake (POS) was created as an alternative to Proof of Work (POW), which is the original consensus algorithm in Blockchain technology, used to confirm transactions and add new blocks to the chain.
  • Proof of work (POW) requires huge amounts of energy, miners having to sell their parts to finally pay the bill; Proof of Stake (PoS) gives mining power based on the percentage of coins held by a miner.
  • Proof of participation (POS) is considered to be less risky in terms of the potential for minors to attack the network, as it structures compensation in a way that makes an attack less advantageous for the minor.

Understanding proof of participation (PoS)

Proof of participation was created as an alternative to proof of work (PoW), to tackle the problems inherent in the latter. When a transaction is launched, the transaction data is integrated into a block with a maximum capacity of 1 megabyte, then duplicated on several computers or nodes on the network. The nodes are the administrative body of the blockchain and verify the legitimacy of the transactions in each block. To complete the verification step, the nodes or miners should solve a computer puzzle, known as the proof of work problem. The first miner to decrypt each block transaction problem is rewarded with a coin. Once a block of transactions has been verified, it is added to the blockchain, a transparent public register.

Mining requires great computing power to execute different cryptographic calculations in order to unlock IT challenges. The computing power translates into a large amount of electricity and energy necessary for proof of work. In 2020, it was estimated that a Bitcoin transaction required the amount of electricity needed to power 1.57 American households per day. To pay the electricity bill, miners would typically sell their allotted coins for fiat money, which would lower the price of cryptocurrency.

The proof of participation (PoS) seeks to solve this problem by attributing mining power to the proportion of coins held by a miner. In this way, instead of using energy to answer PoW puzzles, a PoS miner limits himself to extracting a percentage of transactions that reflects his participation. For example, a miner who owns 3% of the available Bitcoin can theoretically only mine 3% of the blocks.

The first cryptocurrency to adopt the PoS method was Peercoin. Nxt, Blackcoin and ShadowCoin quickly followed suit.

Network attack risk

Bitcoin uses a PoW system and as such is susceptible to a potential Commons tragedy. The commons tragedy refers to a future time when there will be fewer bitcoin miners available due to little or no block reward from mining. The only fees that will be earned will come from transaction fees which will also decrease over time as users choose to pay lower fees for their transactions. With fewer miners than needed to extract coins, the network becomes more vulnerable to a 51% attack. A 51% attack occurs when a miner or a mining pool controls 51% of the network’s computing power and creates fraudulent transaction blocks for itself while invalidating the transactions of others on the network.

With a PoS, the attacker would need to get 51% of the cryptocurrency to conduct a 51% attack. The proof of participation avoids this “tragedy” by making it disadvantageous for a miner holding 51% of the capital of a cryptocurrency to attack the network. Although it is difficult and costly to accumulate 51% of a reputed digital coin, a minor holding 51% of the capital would not be in his interest to attack a network which he holds in majority. If the value of the cryptocurrency decreases, it means that the value of its assets would also decrease, and therefore the owner of the controlling interest would be more incentive to maintain a secure network.

In addition to Bitcoin, Litecoin (LTC) also uses the PoW method. Nxt (NXT) is an example of cryptocoin that uses the PoS method. Some coins like Peercoin (PPC) use a mixed system where both methods are incorporated. Currently, Ethereum (ETH) is in the process of upgrading to a PoS system.

Leave a Comment

Your email address will not be published. Required fields are marked *