WTF is Proof of Stake?

In my last article I talked about proof of work, the most well known consensus mechanism used in the Bitcoin blockchain, as well as many others. You’re probably rolling your eyes at ANOTHER jargon acronym, but don’t worry, proof of stake is another one that isn’t too difficult once you break it down.

WTF is proof of stake?

Proof of stake (sometimes shortened to POS) is another consensus mechanism used in certain blockchain networks. It is less common than proof of work, but is growing in popularity because of the disadvantages of proof of work.

Problems with proof of work

There are a few reasons people are realising proof of work is maybe not the ultimate ideal consensus mechanism you can have in a blockchain network. Firstly, the power gobbled up by miners in Bitcoin and other networks is one of the major flaws people talk about because it’s not exactly friendly to the environment.

One of the other major challenges with distributed ledger technology in general is the ability to scale systems – basically build them big enough so they’re useful to people. Proof of work used within a network means that network does not scale easily, because the more transactions that are added to the network the more electricity needed to put them into blocks, and the slower everything gets.

That’s why the Bitcoin network can currently only handle 3-4 transactions per second at the moment and maximum 8-9 (https://blockchain.info/charts/transactions-per-second). That’s a LOT slower than our traditional payment networks like VISA and Mastercard.

Another issue with proof of work is that it drives down the price of whatever crypto-asset is being mined. So in the Bitcoin network for example, miners win the new bitcoins in the form of the block reward and then they go and sell them for dollars/pounds/euros etc because they need to pay their electricity bills and most energy companies do not accept bitcoin (yet) as payment. This pushes the price of bitcoin down.

Proof of stake (nothing to do with vampires)

So proof of stake is being developed as an alternative to all this mining.

Proof of stake is different because there are no miners. It is still a consensus mechanism – which means it is still a way of getting the network to agree on the current state of affairs of the blockchain. So the purpose is the same. This is done despite no one knowing who anyone else is on the network, which is what makes the system so innovative and cool.

There are a few different things about proof of stake and how it works compared to proof of work.

How proof of stake works

Firstly, there are no miners. The equivalent people in a proof of stake network are called ‘forgers’. There are no new crypto-assets created in the process of forging, like in proof of stake. This is usually called the block reward – but in proof of stake systems doesn’t exist. In proof of stake, the way forgers get rewarded for what they do is purely through transaction fees paid by people sending transactions through the network.

There is a pool of validators. Validators are basically potential forgers. So everyone joins this pool hoping to be the chosen one (a bit like in Bitcoin where everyone wants to be the miner who wins the race to mine the next block). Anyone can join the validator pool, so it’s all nice and inclusive.

Knights of the round table

Validators ‘stake’ their crypto which means they slam it down on the table saying ‘I will give you this much crypto to be the forger (and receive the transaction fees) and if I don’t forge properly you can take it from me’. I think of it like knights of the round table where everyone is wearing chainmail and helmets and they drive a sword into the table (with gold-encrusted crypto symbols) and each make their stake….
But that’s just me getting carried away.

The more crypto you stake the more chance you have of being the forger selected from the validator pool. So if one of them has only staked 2% of all the crypto available in that network, they will only theoretically have the ability to validate 2% of the blocks.

Continuing with the round table – one of the knights will be chosen to be the forger for the next block by the algorithm in the network. He will get up from the table victorious and collect the transaction fees rewarded for validating that particular block. Then another block will come along needing to be validated and the whole thing will happen again.

Who is using proof of stake?

I said proof of stake is being considered as an alternative to proof of work. Ethereum is the best known network looking to implement proof of stake. They will update the Ethereum protocol sometime in the near future with a round of updates called ‘Casper’, which will include a move from proof of work to proof of stake.

The move is supposed to be gradual, with both mechanisms operating simultaneously for some time first. One block every 100 blocks will use proof of stake, then gradually this will increase to be the full amount of blocks mined.

Another network that uses proof of stake is NXT. There is more and more interest growing in proof of stake as a more environmentally friendly and economic consensus mechanism compared to proof of work, so it’s likely we’ll see more protocols being built using this system.

Delegated POS

There is another modification in the proof of stake mechanism (I know, another different consensus protocol – how many versions can you have?! Answer = many!) that is in development by some companies. Delegated proof of stake involves exactly what it sounds like – you delegate your validation to someone else, probably an experienced validator with better hardware who interacts more frequently with the blockchain than you.

There is a downside to this, in that if you and I delegate to the same person or business because they’re well known for doing a good job of validation and have a substantial market share in that industry, the likelihood is lots of other people will delegate their vote to them as well.

Suddenly a handful of companies may be performing the validation for one particular protocol and it doesn’t look as decentralized as it was designed to be. But people are working on solving that problem, because delegating your stake will make it easier on a practical level for people to interact with proof of stake systems.

More and more proofs

We’ve looked at proof of work and proof of stake, but there are more out there: proof of authority, proof of time, proof of probably anything you can think of. Next time you’re reading about a blockchain company or you meet someone working in the area, you can be confident you know about the two main consensus mechanisms out there.

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