Why everybody wants Proof-of-Stake?

Why PoS is better than PoW?

Without going into too much details, since anyone can create a block in a public blockchain network, there needs to be a way that everyone on the blockchain can reach consensus, deciding together what block accurately represents recent transactions across the network. This is a challenging problem to get so many users agree on the current state of the blockchain even though they don't trust each other or any central authority. Today there are two types of consensus protocols used in the blockchain networks: proof-of-work (PoW) and proof-of-stake (PoS). Other options are suggested (like proof-of-activity or proof-of-burn), none of them implemented.

So, let’s see if the rising PoS’s advantages over PoW are decisive. We will look over the reasons why people want to execute a proof-of-stake and what the primitive version of this consensus algorithm looked like. It is surprising, why no one has not yet managed to execute a good PoS (which attacks on existing solutions do we know of), but there is evidently some in getting rid of these attacks.

Well, why do people want to execute a proof-of-stake?

A proof-of-stake (PoS) (derived from the English expression “proof of stake”, literally meaning: “confirmation of shares”) describes a security method in cryptocurrencies that is based on the necessity to prove that you have a certain amount of funds on your account. By using this method the algorithm of the cryptocurrency will most probably select the account with the larger amount of funds in order to confirm a regular block in the chain. This method is used as an alternative to the method called “Proof-of-work” (PoW) for which the account with the most processing power is used as the most probable criteria to confirm a certain block in the chain. The described method was launched in 2011.

Advantages of PoS

First of all, the biggest advantage of PoS is its high energy efficiency when compared with the PoW. Whereas in the case of Bitcoin (PoW) a very significant quantity of power and energy is used in the process of selecting the hashes, you can execute the mining for the proof-of-stake on any device with an insignificant load since energy is needed only for the processing of the transactions. Such a system is fully capable of maintaining its integrity and is possibly more resistant to attacks.

The cost-effective low energy consumption for the network secures cheap transactions in the long term. In the case of Bitcoin the creation of new blocks requires ever more processing power, the emission of currency will decrease over time and the main reward for the miners will become their commission fees for the transfers. Since the profitability of mining Bitcoins is continuously decreasing anyhow, the price of equipment and electricity consumption per every generated block will soon result in a significant amount of money. For the miners this implies that they need to select only the transactions with a corresponding high commission fee in order to secure their return on investment. In the case of PoS the minimal expense of making a transfer will always remain at the level of the cost price of the transaction processing.

Here are some arguments in favor of the consistency of this method:

  • in order to attack the system a lot of money is required. Anyone planning an attack will have to allocate a sizeable amount of money.
  • If anyone planning an attack manages to collect the sizeable amount of money, he himself will also suffer from the attack since the stability of the cryptocurrencies will be upset.
An attack of 51% is possible only when the miner possesses the larger part of all coins. Buying 51% of all coins is considerably more expensive than buying hardware for 51% of the processing power of the network. However, even in the case of a successful attack and the resulting loss of confidence in the network, the exchange rate of the currency will sharply fall and the attacker will be left with a huge amount of coins that lost their value. In other words, the expenses for an attack will be significantly higher but the reason for an attack will be very low. In the same way as it becomes less probable that someone will succeed in organizing an attack in view of the increasing processing power of PoW of the network, it also becomes less probable that someone will succeed in acquiring half of all coins in view of the distribution of coins among a large number of PoS network users.   

Here are some arguments reflecting apprehension:

  • PoS provides for additional incentives to see more resources accumulated in one pair of hands, which may have a negative impact on the decentralization of the network.
  • If a group of users would unite into a small group concentrating relatively huge funds they might impose their conditions how to work with crypto currency whereas a larger group of minority users, not controlling the processing scheme, may well disagree.

The problems of PoS and their solutions

Nothing at Stake

There is a serious problem in the simple proof-of-stake algorithm: if a fork is accidentally formed in the chain of blocks, then the users think it to be rational to mine the blocks on both branches. Unlike PoS, the optimized strategy in PoW is always to mine only one branch because the distribution of resources over more than one branch decreases the possibility of finding one block on one of the branches. This problem may result in possible double-spending and other attacks caused by the bifurcation of the chain.
This problem is solved by the CASPER system assuming to make a deposit in order to become part of the consensus at the expense of creating blocks. As soon as a validator creates a block that is considered to be invalid, the deposit gets burnt and the right to participate in the consensus of the network gets lost.

The distribution of initial wealth

There is yet another problem in the PoS system: there is insufficient activity for the distribution of the coins among the initial owners since their presence directly contributes to the increase of wealth. In the PoW systems everything is balanced: improved hardware is needed for mining. In order to solve this problem additional algorithms are used for the distribution of wealth, for example: Peercoin and Ethereum are using PoW to create new coins.

Constructing an alternative chain

In the PoS consensus system the attacker, provided that he has sufficient computing power, may endeavour to build an alternative chain of blocks starting with the very first block. In PoW systems such attacks are not possible because of the huge computing power that is necessary to build each block. In order to prevent such an attack, the maximum permissible depth of the branching points is indicated in the protocol. For example, Nxt user may not approve an alternative blockchain if it differs from the existing block chain by more than 720 numbers of the latest blocks (existing during the latest 12 hours). Nevertheless, this restriction does not solve the problem for new users. A possible way out of this problem may be the load of the block chains to consist of confidential resources, although, on the other hand, this will make the system semi-centralized.

The age of coins

Another typical attack for Peercoin and other systems is using the age of coins instead of their quantity to determine the stake of the user. In the first versions of Peercoin the age of coins was not limited and for this reason the attacker could accumulate a number of sufficiently aged coins to conduct his malicious actions. For example, an attacker having 5% of all coins could divide them in a few parts and wait until the moment when the age of the coins is 10 times more than the average age, which would allow him to make double-spending and other attacks. The presence of a few number of such users could negatively impact the quality of the network. In the case of Peercoin this problem was solved by limiting the age of coins to 90 days.

All in all, it appears like PoS helps to avoid some of the major issues associated with the PoW scheme. The most obvious of them is the above-mentioned 51% attack. Secondly, as it doesn’t involve competing to solve difficult hash puzzles, it eliminates a large part of the energy requirements needed to mine, which is unquestionably beneficial for miners as well as for the environment. Apart from this, PoS also brings different economic benefits its HODLers by giving them the option of running a masternode or staking their coins in a wallet. In a nutshell, you can earn by simply holding a large sum of PoS cryptocurrencies. There are some key advantages to this – people are encouraged to hold onto their coins as they essentially earn interest which avoids the tragedy of the commons with PoW.

To sum it up, PoS seems like a positive step forward in terms of technical as well as economical development of the blockchain technology. No wonder that some cryptocurrencies have already caught up the trend: EmerCoin, NovaCoin and YaCoin use both protocols, PeerCoin and Reddcoin implement PoW for initial distribution, and PoS – for transaction confirmation. Nxt and BlackCoin use PoS on all stages. A significant proof of PoS promising future is Ethereum being one of its supporters. We believe that if and when PoS is implemented, it would be a major shift in the world of cryptocurrencies.


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