Proof of Stake

Proof-of-Stake first appeared in 2012 when Sunny King and Scott Nadal published their paper on Peercoin. They described the consensus mechanism as “peer-to-peer cryptocurrency design derived from Satoshi Nakamoto’s Bitcoin”.

The Peercoin network was launched with a cross between a proof of work (PoW) and proof of stake (PoS) mechanism, with PoW mainly being used to store the initial stock. However, PoW was not required for the long-term sustainability of the network, and its importance was gradually reduced. In fact, most of the network security relied on PoS.

Before diving into what proof of stake is, it’s important to mention proof of work. The Bitcoin network uses a so-called Proof of Work (PoW) consensus mechanism. The PoW is the mechanism by which the transactions are collected into blocks, and then linked together to create the blockchain. Miners compete among themselves to solve a complex mathematical calculation. The miner who has done this first gets the right to add the block to the blockchain and receives the reward for this (which means bitcoins in this case).

Proof of Work has proven over time to be a very robust mechanism to facilitate consensus in a decentralized way. The problem, however, is that it involves a lot of random calculations. The puzzle the miners are trying to solve only serves to keep the network safe. Indeed, it keeps the network safe but the energy could also be better distributed.

To solve this problem, there is proof of stake. The main idea is that the participants in the network can lock their coins (their “stake”). Someone can decide to participate in the Proof of Stake algorithm. He will first have to bet money for this, the stake. It is then determined what someone’s interest is within the network. The protocol randomly grants the right to one of the people (with a high interest) to validate the next block. Usually, the odds of being picked are proportional to the number of coins – the more coins staked, the higher the odds. For example, the participants who create new blocks are not chosen based on their computer power as how it is with PoW, but the participants are chosen based on the amount of coins they have in their possession.

The stake gives the right to validate blocks, but also ensures that nodes do their best to do a good job. If someone does not comply with the rules set by the network, it can be decided to take the bet and remove someone from the network. In this way, the network wants to ensure that they can trust whoever is validating blocks.

Proof of Stake entitles nodes with a share of network tokens to receive rewards for validating blocks. This consensus is in contrast to the Proof of Work algorithm used in Bitcoin, a lot more environmentally friendly. Proof of Work is all about who has the most computing power.