Introduction to Proof-of-Stake

Sep 22, 2018   |   by Tianyu Wu   |   Basics & Beyond

Cryptocurrency faced many criticisms when it was created because its existence breaks free from a lot of the restrictions that apply to fiat currencies. However, like any new technology, cryptocurrency also faced threats that are only specific to itself. For example, the recent 51% attack on Bitcoin Gold caused a drop in the public’s confidence for the whole cryptocurrency industry. 51% attacks are one of these new crypto-specific threats that cannot happen in traditional markets. Though the loss during this event was limited, due to the small size of the Bitcoin Gold user base, the existence of such an attack created an atmosphere of urgency among crypto developers and computer scientists. Worth noticing is a recently developed consensus algorithm that shows promise in improving the security aspects of blockchain networks, including a preventive measure for 51% attack. This new concept is designed to replace the old Proof-of-Work system by exhibiting higher security for participants and superior efficiency for miners.

Before diving into the newly developed design, a person needs to understand how its predecessor works. The earliest blockchain networks are based on a “Proof-of-Work” system. In this system, the first user to find the answer to a difficult mathematical problem will be granted the access to verify and create a block on the public ledger. Since these math problems are framed in a way that can only be solved by brute force (simple calculations repeated trillions of times a second with small variations each time to result in a different answer), the user who possesses the maximum computing power will always control most of the blocks on a ledger. This feature of Proof-of-Work systems was exploited by hackers to launch a 51% attack during the unfortunate incident mentioned before.

Proof-of-Stake, on the other hand, uses the amount of cryptocurrency a staker holds as the determining factor in it's search for validators of the blockchain network. This is opposed to proof-of-works search for computational power. Within this system, a staker who seeks qualification for reviewing the blockchain network would need to lock a certain amount of cryptocurrency as stake. And the more coins that participant puts at stake, the more blocks that participant will find. This design of Proof-of-Stake is based on the philosophy that the users with more crypto at stake have their best interest in maintaining the security of the blockchain network. If the system is attacked, not only would a large amount of cryptocurrency be stolen, but the price of that cryptocurrency would also drop. Stemming from that basic principle, there are many methods of selection for an ethical person to be the validator of a block. The most basic one uses a randomized algorithm to allocate different numbers of blocks to stakers according to the size of their stake. For example, presume that Staker A put a number of crypto coins that is equivalent to 10% of the total crypto being issued as stake, then A will acquire the access to validate 10% of the blocks in this network. Another way of selection takes into accounts the age of crypto-coins. It means that when operating within this system, stakers will not only need a large number of crypto coins as stake but also need to stake these coins for a long amount of time. Additionally, the blockchain using this algorithm will reset the age of stake for the selected validator, creating a decentralized validator base and preventing the formation of a monopolizing coalition.

Compared with traditional Proof-of-Work systems, the newly developed Proof-of-Stake demonstrates many advantages over the older Proof-of-Work. First, in a blockchain network based on Proof-of-stake, a 51% attack becomes expensive and self-contradictory because getting the majority of a cryptocurrency is far too difficult when compared to acquiring a majority of computational power (which worked in the old Proof-of-Work system). Second, removing computational power saves miners’ expense on electricity and equipment maintenance fees, which does mother nature a big favor and lowers the bar for becoming a block validator.

Cryptocurrencies like Peercoin, Nxt and Blackcoin have started implementing Proof-of-Stake systems on their blockchain networks. In 2017, Ethereum initiated the process of switching to this system, foreshadowing a transformational trend in the whole industry. However, just like any other new concepts, Proof-of-Stake is presumably vulnerable to some theoretical assaults like “nothing-at-stake” and “long-range attacks”. Despite the downsides of Proof-of-Stake, being aware of potential threats forge opportunities for developers to make further improvement in mechanisms before the actualization of a possible crisis.

Tianyu Wu