What is proof of stake?
Proof-of-stake is a type of consensus mechanism used in cryptocurrency.
Consensus mechanisms are used to validate a blockchain, add new blocks and keep it secure. They are essentially a set of rules or an agreement that allows nodes in a blockchain network to determine which transactions are valid.
Proof-of-work and proof-of-stake are two types of consensus mechanisms used in the cryptocurrency space.Proof-of-work is the original type of consensus mechanism. This model requires users to solve complex cryptographic puzzles. The first miner to solve the puzzle gets to add to the blockchain and earn rewards.
Proof-of-stake was created as an alternative. It allows cryptocurrency owners to validate blocks by offering their coins as collateral. Users who stake their coins are called validators.
This is beneficial, because the people validating transactions are financially invested in the system.
Proof-of-stake was designed to address scalability concerns faced by proof-of-work mechanisms, as well as to be more secure and more environmentally sustainable.
The main difference is that proof–of-stake uses randomly selected miners to validate transactions, while proof-of-work uses a competitive validation method.
Etherum started its existence using proof-of-work and is now making the transition to Proof-of-stake.The process is lengthy and complex and can take years to complete for an already established cryptocurrency.
Examples of cryptocurrencies that use proof-of-stake include Tezos, Cardano and Algorand.
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What is the history of proof-of-stake?
The concept of proof-of-stake dates back to 2012, when developers Sunny King and Scott Nadal proposed it as a way to address high energy consumption associated with Bitcoin mining.Their alternative, dubbed “staking” used an algorithm to choose nodes based on the number of coins an individual had to stake.
King went on to launch Peercoin in 2013 as the first cryptocurrency to use proof-of-stake, while still maintaining proof-of-work. This was followed by other cryptocurrencies like Blackcoin adopting proof-of-stake.
Ethereum will soon undergo a high profile upgrade called the “Merge,” which will merge the Ethereum blockchain with a separate blockchain and introduce the proof-of-stake consensus mechanism. Developers say this will cut Ethereums’ energy consumption by more than 99 per cent. The Merge is expected to be complete sometime in September 2022.
How does proof-of-stake work?
Validators are chosen at random to validate the next block of transactions. The more cryptocurrency a user stakes, the higher their chance is of being selected as a validator.
Validators validate a block of transactions and add it to the blockchain.
If validators try to cheat the system in any way, they face consequences like “slashing,” which means their stake is taken away.
To be an Ethereum validator, for example, you must deposit 32 ETH into a deposit account and run several different pieces of software. Once the deposit is made, the user is added to an activation list that restricts the number of validators joining the network.
Validators can then receive new blocks from peers. The transaction in the block is re-executed and the block signature checked to verify it is valid. The validator then sends an attestation to the network in support of the block.
In some cases, exchanges, like Binance offer staking for various tokens and allow users to participate by buying or depositing coins and holding them in their exchange wallet, where staking rewards are then paid out.
What are some advantages of proof-of-stake?
Security: Proof-of-stake is considered more secure than proof-of-work. In the cryptocurrency world, users have long discussed the possibility of a “51 per cent attack.” This unlikely scenario would see a single user control 51 per cent of a cryptocurrency and use that advantage to alter the blockchain. This threat is even less likely under a proof-of-stake system, because a user would have to own 51 per cent of the staked cryptocurrency. In the case of Ethereum, an attacker would need about $15,000,000,000 USD of staked ETH.
Energy use: Proof-of stake is also more environmentally sustainable, because it uses less energy than proof-of-work. For example, Bitcoin is estimated to use 110 Terra-Watt hours of energy annually, which is more than the consumption of some entire countries.
Accessibility: Proof-of-stake is more accessible than proof-of-work, which requires a high level of computational power and equipment that is expensive. Validators also don’t have to solve complex puzzles to participate.
Scalability: Proof-of-stake allows transactions to be processed quickly and at a low cost, which are both important factors for the scalability of cryptocurrencies
What are some disadvantages of proof-of-stake?
Nothing at stake: The “nothing at stake” scenario is commonly cited as a possible threat to the proof-of-stake model. This problem, first raised by Ethereum co-founded Vitalik Buterin, suggests an attacker could fork the blockchain and verify transactions on both blockchains to get rewards from both. Ethereum has proposed a solution to this – validators will face consequences that will disincentivize them from signing orphaned blockchains.
Centralization: There is concern the proof-of-stake model could centralize power among those who can afford to buy the most tokens. For example, the Ethereum 2.0 network requires validators to stake a minimum of 32 ETH, which is a large sum that could be out of reach for the average user.
Access to coins: In some cases, cryptocurrencies that use proof-of-stake require a user’s staked coins to remain locked up for a minimum amount of time.
Proof-of-stake is a consensus mechanism that requires users to offer their coins as collateral for the opportunity to validate blocks.It was created as an alternative to proof-of-work and aims to address some of the challenges with that model. Both proof-of-work and proof-of-stake consensus mechanisms have pros and cons.Proof-of-stake benefits include fast, low-cost transactions, less energy use, more accessibility and more security. However, there are also downsides like the potential for power to be centralized with users who can afford the most tokens. Some very large and fast-growing cryptocurrencies have implemented proof-of-stake or are in the process of doing so, such as Ethereum.