Abbreviation: PoS

What is Proof of Stake?

Proof of Stake is a method used in cryptocurrency systems to achieve distribute consensus whilst securing the network against malicious actors. It was developed as an alternative to Proof of Work (PoW) systems, which require a large number of calculations to be performed and are therefore considered by some to be unnecessarily costly and inefficient.

The first cryptocurrency to successfully implement a Proof of Stake system was Peercoin.

Whereas PoW systems require miners to prove that they have performed some computationally costly actions in order to participate in forming the distributed consensus, PoS systems instead require that a person holds some of the cryptocurrency in their wallet. The more coins a wallet has, the more votes it can cast as to what it thinks is the correct state of the network. The basic principle behind this is that in order to have enough coins to take control of the network and influence the consensus in your favour you would have to own over half of the network yourself, in which case you would effectively be attacking yourself – an illogical an uneconomical thing to do.

In return for keeping a wallet / node containing coins open for ‘staking’, the owner is rewarded with new coins which are often generated by inflating the coin supply and may or may not come from recycled transaction fees. This equivalent to Bitcoin’s ‘mining’ method of generating new coins is often called ‘minting or ‘forging’.

Most PoS coins which pay a reward from newly generated coins set a target interest rate which users can expect to earn from staking their coins. This also becomes the maximum rate at which the currency supply is inflated over time, although in practice not all coins will be staked and therefore the real inflation rate may be lower than the target interest rate. Alternatively static block rewards can be used, which is a technique pioneered by BitBean

Comparison with Proof of Work

  • Because this system does not provide any way to handle the initial distribution of coins, cryptocurrencies which use this system either begin life with a PoW mining phase or with an ICO or sale of pre-mined coins.
  • PoS is substantially more efficient, as the electricity and hardware costs required by PoW are not needed.
  • Within a PoS economy there is an even stronger the usual tendency for the rich to get richer, as they are the beneficiaries of ‘staking’.
  • PoS can encourage a greater number of people to run nodes as the cost of participating can be very low compared to PoW, which may make such a system more decentralized.
  • Because ‘minters’ do not need to recoup hardware costs, as PoW ‘miners’ do there may be less downward pressure on the price from newly generated coins. This does not take into consideration the initial coin distribution, however, which often brings a very large number of coins instantly onto the market. Also, the other side of this same coin is that PoW coins could be argued to be ‘backed’ by a certain value of computational resources, whereas there is no such backing for PoS coins.

The ‘Nothing at Stake’ Problem

This is a theoretical problem which, according to some academics, makes Proof of Stake cryptocurrencies more vulnerable to attack that Proof of Work cryptocurrencies.

The problem is that PoS if there is a fork in the blockchain – two competing versions of the transaction history – there is nothing to force minters to choose just one. They can simply stake their coins on both chains and maximize their profit whichever one gets accepted by the network. This means that it is cheap and easy to try to manipulate the transaction history in your favour, so even if there is only a very small chance of success it may still end up being a profitable venture.

There are no documented cases of this vulnerability being exploited, and some commentators claim that it is a purely academic problem which is highly unlikely to become a practical problem in the real world. But despite this, most PoS cryptocurrencies adopt measures to mitigate against the nothing at stake vulnerability. For example:

  • Peercoin uses centrally broadcast checkpoints, which is a highly reliable solution, but one which contradicts the decentralized ethic of cryptocurrency.
  • NXT limits the period during which blockchain re-organizations are allowed, after which the chain becomes permanently fixed. This limits the number of forks a malicious forger can attempt to stake on.

PoS Variants

Delegated Proof of Stake

First seen on the Bitshares blockchain, this system asks users to vote for ‘delegates’. Each user’s voting power depends on their ‘stake’ in the network, measured by how many coins they own. A certain number of delegates are then elected by the blockchain, and given the exclusive right to earn PoS revenue from running a full node.

This system is supposed to be more efficient than regular PoS, requiring lower fees in order to maintain the network. It can also be put to other uses. For example, in Bitshares itself the delegates or ‘workers’ who get elected are supposed to take part of their income as pay and then use the rest to help build and promote Bitshares and the ecosystem of services which use it.

Proof of Importance

In order to encourage economic activity NEM introduced an expansion of PoS called ‘Proof of Importance’ (PoI). This system calculates rewards based on both a user’s balance and the number of transactions they are involved in. It also takes into consideration who those transactions are with, in order to prevent users from endlessly sending coins to themselves so as to gain PoI rewards.

Proof of Stake Velocity

Introduced by Reddcoin, this system rewards users according to how many coins they have, but also how active they are (how many transactions their address has been involved in). The purpose of this is to encourage the use of the coin rather than hoarding, particularly for social media tipping and other small ‘microtransactions’ which Reddcoin was designed for.

Proof of Stake-Time (PoST)

This term was first used by Vericoin, although Peercoin also has a similar system. It uses coin age to determine the probability of a given account mining a block rather than just the number of coins an account has to stake. The basic formula is to multiply the number of coins by the period during which they have been held at a given address. This can then be tweaked in order to gain specific results. For example, in the Vericoin implementation the system is designed to encourage the rich to spend and to reward the poor for holding.

Many Proof of Stake systems have a minimum coin age which must be reached before an account can begin staking, but in a true PoST coin your chances of staking will continue to rise as your coins age, even beyond any minimum requirements.

The purpose of this is to prevent what is often considered to be the biggest problem with PoS systems: they make the rich richer and do nothing for the poor.

Proof of Stake Anonymous (PoSA)

Cloakcoin introduced a version of PoS in which users who unlock their wallet for staking participate in helping to anonymize transactions for other users. Anybody who wants to send an anonymous transaction pays an extra fee, which is then distributed as PoSA earnings. The more coins a person has available for staking the more likely they are to earn PoSA.

PoS Whitepapers

  1. PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake
  2. Proof of Activity (PoA): Extending Bitcoin’s Proof of Work via Proof of Stake
  3. Proof-of-Stake-Time by Vericoin
  4. PoSA v3 by Cloakcoin
  5. NXT PoS
  6. Blackcoin’s Proof-of-Stake Protocol v2
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