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The Proof of Stake consensus algorithm was introduced in 2011 on the Bitcointalk forum to solve the problems of the currently most used algorithm: Proof of Work. Although both have the same goal of reaching consensus in the blockchain, the process to achieve the goal is completely different.
How does it work?
The Proof Of Stake algorithm uses a pseudo-random selection process to select a node that will be the validator of the next block, based on a combination of factors, which can include age, randomization, and node wealth rates.
It is pleasant to note that in Proof of Stake systems it is considered that the blocks are “forged” and not extracted. Cryptocurrencies that use Proof of Stake often start selling coins mined or work with the Proof of Work algorithm and then switch to Proof of Stake.
While cryptocurrencies are increasingly being created in Proof of Work systems as a reward for miners, the Proof of Work usually uses transaction fees as a reward.
Users wishing to participate in the forgery process are required to block a certain number of coins in the network as their bet. The size of the bet determines the possibility that the node is selected as the next validator, to simulate the next block: the greater the bet, the greater the odds.
So that the process does not give preference only to the richest nodes in the network, other unique methods are added to the selection process. The two most commonly used methods are the selection of randomized blocks and the selection of the coin age.
In the randomized block selection method, validators are selected by looking for nodes with a combination of the lowest hash value and the highest bid, and since the bet size is open, the next falsifier can usually be predicted from other nodes.
The coin age selection method selects the nodes based on how long their tokens have been played. The age of the coins is calculated by multiplying the number of days during which the coins were considered as a bet by the number of bets.
After a node has forged a block, its coin age is reset to zero and they have to wait a certain period of time to be able to forge another block – this prevents the dominance of high-stakes nodes in the blockchain.
Each cryptocurrency that uses the Proof of Stake algorithm has its own set of rules and methods, combined for what they think is the best combination for them and their users.
When a node is selected to create the next block, it checks if the transactions in the block are valid, signs the block and adds it to the blockchain. As a reward, the node receives commissions for transactions associated with transactions in the block.
If a node wants to stop being a forger, its offer together with the prizes earned will be released after a certain period of time, which will give the network time to verify that the node has not added fraudulent blocks to the chain.
The count acts as a financial motivator for the counterfeit site, in order not to control or create fraudulent transactions. If the network detects a fraudulent transaction, the fake site will lose part of its quota and its right to participate in the forgery in the future. Therefore, as long as the rate is higher than the premium, the validator will lose more coins than it earns in case of attempted fraud.
To effectively monitor the network and approve fraudulent transactions, the site should have a majority packet on the network, also known as a 51% attack. Depending on the value of the cryptocurrency, this would be very impractical, since 51% of a source of work is required to gain control of the network.
The main advantages of the Proof of Stake algorithm are energy efficiency and safety.
More users are encouraged to run nodes, as it is simple and accessible. This, along with the randomization process, also makes the network more decentralized, as data mining pools are no longer needed for data mining blocks. And since there is less need to release a lot of new coins to receive rewards, this helps the more stable price of a particular currency.
It is pleasant to remember that the cryptocurrency industry is changing and developing rapidly, and there are also many other algorithms and methods that are developed and tested with them.