Proof of Stake (PoS)

Proof of Stake (PoS) is an alternative consensus mechanism to Proof of Work (PoW) used in blockchain networks.

To reduce the problem of handling monopoly and the power conjunction in a PoW- based system, different other consensus mechanisms came into practice. The second most popular consensus mechanism is the PoS mechanism.

This PoS mechanism was proposed in 2011 by Vitalik Buterin. PoS is an updated version of PoW where users must have a stake to participate in the mining process. This consensus aims to create a secured system where peers can validate the transactions considering integrity. Miner, also known as a forger, is elected in a semi-random process. There are mainly two things to consider for the procedure. First is the user’s stake. It is based on depositing a certain token in the system as a virtual account. A peer having more stakes has more chances to get selected to mine block. A degree of chances should be added to the process for avoiding biases. The second thing is to add randomly to the semi-random process. For this, there are two methods: randomized block selection and coin age selection.

The forger with the lowest hash and the highest stake is selected in randomized block selection. The validator is selected based on how long its token has been staked in coin age selection. As long as the node holds the coins, the node gets more network rights.

Advantages

Reduced electricity consumption: PoS does not impose any mathematical problem on the network users need to solve. Hence, it reduces energy consumption.
Secure against 51% attack: To carry out 51% attack, 51% of the cryptocurrency needs to be secured by the adversary, which is very costly, even if the miner accumulates the same, it will not be advantageous as a decrease in the value of cryptocurrency will prove to be a loss to the miner as it affects its own assets. Hence, PoS models are significantly less prone to 51% attack.
Easy Staking: It is due to mass participation and less stress on network participants. The rate of participation increases as stakers do not have to worry about hardware utilization making it more decentralized.
Decentralization: As power consumption dependency is significantly less in PoS, it somewhat solves the centralization problem of PoW Proof of Stake solves the centralization. Moreover, it becomes more accessible and environmentally friendly.

Disadvantages

Favor the rish: The network can be influenced by the nodes holding more wealth, thus obtaining the chance to process transactions, charge a commission, and become richer.
Suffers from nothing-at-stake attacks: The Concept is to maximize profit by putting nothing at stake. Generally, when forks are created in BC, the longest chain is considered and other chains are considered orphaned. In this kind of attack, all the chains are followed so that participant gets rewards either way, and one chain out of them will be picked as a winner.
Suffers from grinding attacks: For favoring an adversarial stakeholder, malicious parties will use computational resources for biasing leader election, thus creating grinding vulnerability.

Variations of PoS:

There are many variations of PoS, and each solution is an improvement on the original Proof-of-Stake solution, each providing resource efficiency and effectiveness.

Delegated PoS (DPoS): It was developed in 2014 by Daniel Larimer, founder of BitShares, Steemit, and EOS. The more stake a node owns, the more powerful voting power it has to assign the witness. In DPoS, stakeholders can either vote directly or give their voting power to another stakeholder to vote on their behalf. These users are called ‘witnesses’. They are chosen using an election sys- tem to verify blocks. If witnesses sign and verify all transactions in the block, a reward is given to them, shared with the stakeholder who voted for them. If they fail to verify all the transactions, then no reward is provided to them, and the reward is added to the next witness verifying the transactions. There is another set of users called ‘delegates’ who govern the BC for any change in block size or amount to be paid to the witness. DPoS provides decentralization and better reward distribution. They do not require any high computation power and are more scalable. One of the disadvantages of DPoS is the possibility of ruling the network by creating cartels of witnesses. Applications like BitShares, Steem and Steemit, and EOSIO are based on the DPoS mechanism.
Leased PoS (LPoS): LPoS, launched in 2017 as a part of Waves project, is an improvement on PoS where nodes with a low number of coins can participate by taking currency on lease from other nodes with high stakes. The coins are in total control of the account holder. When the nodes with low stakes validate the block, the reward is shared with the wealthy holders who gave the lease. While in DPoS, an election-based system was used, the stakeholders can borrow and lend tokens directly to participate in the system themselves. Such a system is more scalable with high throughput, fast, and energy-efficient.
Proof of Importance (PoI): PoI was introduced in 2015 and is used by the cryptocurrency New Economic Movement (NEM). The reduced transaction flow issue of PoS is addressed by PoI. Every node in PoI is assigned an importance score. It not only rewards the nodes with high stakes, but it also rewards users based on more number of transactions. A node performing transactions with a node of high importance score value will get a chance to mine the next block. PoI is highly scalable, fast, energy-efficient, and does not require any special hardware.
PoS Velocity (PoSV): PoSV, used by Redcoin cryptocurrency, is designed to encourage social interactions in the digital age. It is an improvement over PoW and PoS. Two main functions of Redcoin, i.e., storage of value and medium of exchange, correspond to ownership, i.e., stake and activity, i.e., velocity. The higher the value of velocity, the better is the economy. It does not use a linear coin age function but instead uses an exponential growing function to encourage node activity.

Applications: Crytocurrencies such as Peercoin, Nxt, Ethereum 2.0, Qora, Black- Coin, and ShadowCash are based on the PoS mechanism.

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Advantages

Reduced electricity consumption: PoS does not impose any mathematical problem on the network users need to solve. Hence, it reduces energy consumption.

Secure against 51% attack: To carry out 51% attack, 51% of the cryptocurrency needs to be secured by the adversary, which is very costly, even if the miner accumulates the same, it will not be advantageous as a decrease in the value of cryptocurrency will prove to be a loss to the miner as it affects its own assets. Hence, PoS models are significantly less prone to 51% attack.

Easy Staking: It is due to mass participation and less stress on network participants. The rate of participation increases as stakers do not have to worry about hardware utilization making it more decentralized.

Decentralization: As power consumption dependency is significantly less in PoS, it somewhat solves the centralization problem of PoW Proof of Stake solves the centralization. Moreover, it becomes more accessible and environmentally friendly.

Disadvantages

Favor the rish: The network can be influenced by the nodes holding more wealth, thus obtaining the chance to process transactions, charge a commission, and become richer.

Suffers from nothing-at-stake attacks: The Concept is to maximize profit by putting nothing at stake. Generally, when forks are created in BC, the longest chain is considered and other chains are considered orphaned. In this kind of attack, all the chains are followed so that participant gets rewards either way, and one chain out of them will be picked as a winner.

Suffers from grinding attacks: For favoring an adversarial stakeholder, malicious parties will use computational resources for biasing leader election, thus creating grinding vulnerability.

Variations of PoS:

There are many variations of PoS, and each solution is an improvement on the original Proof-of-Stake solution, each providing resource efficiency and effectiveness.

Delegated PoS (DPoS): It was developed in 2014 by Daniel Larimer, founder of BitShares, Steemit, and EOS. The more stake a node owns, the more powerful voting power it has to assign the witness. In DPoS, stakeholders can either vote directly or give their voting power to another stakeholder to vote on their behalf. These users are called ‘witnesses’. They are chosen using an election sys- tem to verify blocks. If witnesses sign and verify all transactions in the block, a reward is given to them, shared with the stakeholder who voted for them. If they fail to verify all the transactions, then no reward is provided to them, and the reward is added to the next witness verifying the transactions. There is another set of users called ‘delegates’ who govern the BC for any change in block size or amount to be paid to the witness. DPoS provides decentralization and better reward distribution. They do not require any high computation power and are more scalable. One of the disadvantages of DPoS is the possibility of ruling the network by creating cartels of witnesses. Applications like BitShares, Steem and Steemit, and EOSIO are based on the DPoS mechanism.

Leased PoS (LPoS): LPoS, launched in 2017 as a part of Waves project, is an improvement on PoS where nodes with a low number of coins can participate by taking currency on lease from other nodes with high stakes. The coins are in total control of the account holder. When the nodes with low stakes validate the block, the reward is shared with the wealthy holders who gave the lease. While in DPoS, an election-based system was used, the stakeholders can borrow and lend tokens directly to participate in the system themselves. Such a system is more scalable with high throughput, fast, and energy-efficient.

Proof of Importance (PoI): PoI was introduced in 2015 and is used by the cryptocurrency New Economic Movement (NEM). The reduced transaction flow issue of PoS is addressed by PoI. Every node in PoI is assigned an importance score. It not only rewards the nodes with high stakes, but it also rewards users based on more number of transactions. A node performing transactions with a node of high importance score value will get a chance to mine the next block. PoI is highly scalable, fast, energy-efficient, and does not require any special hardware.

PoS Velocity (PoSV): PoSV, used by Redcoin cryptocurrency, is designed to encourage social interactions in the digital age. It is an improvement over PoW and PoS. Two main functions of Redcoin, i.e., storage of value and medium of exchange, correspond to ownership, i.e., stake and activity, i.e., velocity. The higher the value of velocity, the better is the economy. It does not use a linear coin age function but instead uses an exponential growing function to encourage node activity.

Applications: Crytocurrencies such as Peercoin, Nxt, Ethereum 2.0, Qora, Black- Coin, and ShadowCash are based on the PoS mechanism.