What are Proof of Stake Coins: Ultimate Guide – Blockgeeks

Rajarshi Mitra

1 week ago
What are Proof of Stake Coins: Ultimate Guide - Blockgeeks

In this guide, what are Proof of Stake Coins we will introduce you to some promising POS coins. Before we go any further, let’s give you an overview of Proof of stake and why it is preferable over POW.

While proof-of-work (POW) coins have paved the way for cryptocurrencies, all indicators point towards market domination by  POS/ proof of stake coins.  The truly amazing thing about POS is that it is more scalable than POW, while not being nearly as wasteful. However, POS also gives different economic benefits/dividends to its users, such as providing the option of running a masternode or staking their coins in a stake-able wallet. 

What are consensus mechanisms?

By its very definition, a decentralized ecosystem lacks a centralized body controlling its activities. While this keeps them safe from the corruption and perils of a centralized system, it does open up one very valid question.

How does anything get done in a decentralized system?

In a centralized system, the central body is in charge of making decisions, which is a luxury that a decentralized network doesn’t have. To mitigate this, decentralized ecosystems make the use of “consensus protocols.” Consensus is a dynamic way of reaching an agreement in a group. While voting just settles for a majority rule without any thought for the feelings and well-being of the minority, a consensus makes sure that an agreement is reached which could benefit the entire group as a whole.

From a more idealistic point-of-view, Consensus can be used by a group of people scattered around the world to create a more equal and fair society.

A method by which consensus decision-making is achieved is called “consensus mechanism.”

As per Wikipedia, the main objectives of a consensus mechanism are:

  • Agreement Seeking: A consensus mechanism should bring about as much agreement from the group as possible.
  • Collaborative: All the participants should aim to work together to achieve a result that puts the best interest of the group first.
  • Cooperative: All the participants shouldn’t put their own interests first and work as a team more than individuals.
  • Egalitarian: A group trying to achieve consensus should be as egalitarian as possible. What this basically means that each and every vote has equal weight. One person’s vote can’t be more important than another’s.
  • Inclusive: As many people as possible should be involved in the consensus process. It shouldn’t be like regular voting where people believe that their vote won’t have any weight in the long run.
  • Participatory: The consensus mechanism should be such that everyone should actively participate in the overall process.

 The method by which a system achieves consensus is called consensus protocols or consensus mechanisms. While creating Bitcoin, Satoshi Nakamoto completely changed consensus protocols by ushering in the concept of Nakamoto consensus. The requirements for such a protocol are as follows:

  • It should be able to deal with a wide area network.
  • The consensus mechanism should provide proper validation of transactions by at least 2/3rd of the network.
  • Should protect against double-spending.

The unique thing about Nakamoto consensus is the concept of “difficulty.” The difficulty could be some sort of work, resource, or asset, which the member of the network must invest to create a new block. The “difficulty” helps in:

  • Block verification.
  • Controlling the number of coins/tokens floating around in the ecosystem.
  • Bringing security into the system.

We will be looking into the two most popular and widely used forms of Nakamoto consensus:

  • Proof of Work (POW)
  • Proof of Stake (POS)

We won’t go into the details of POW, but let’s give you a brief idea. In a POW consensus system, we have miners in the network who use their computational resources to solve cryptographically hard puzzles. If someone solves the puzzle correctly, then their block gets added to the blockchain. In return, they get a block reward for their efforts.

Unfortunately, POW has two major issues:

  • It is not a scalable system.
  • It is extremely wasteful as it requires miners to waste real-life computational resources.

This is the reason why many projects are opting the proof-of-stake consensus system instead,

What is Proof of Stake?

Proof of stake will make the entire mining process virtual and replace miners with validators. This is how the process will work:

  • The validators will have to lock up some of their coins as a stake.
  • After that, they will start validating the blocks. Meaning, when they discover a block that they think can be added to the chain, they will validate it by placing a bet on it.
  • If the block gets appended, then the validators will get a reward proportional to their bets.

Apart from the consensus mechanism, there are some projects which allow for special staking functionalities. In these projects, the holders lock up a portion of their tokens in the network to receive special privileges such as voting and hosting masternodes. Another thing that you need to note is that each project has its own version of the Proof of stake S algorithm. In this guide, we are going to be looking into three projects who are using (or going to use) a variation of the Proof of Stake algorithm, namely – Ethereum, EOS, and Tezos. After that, we are going to be looking at how Dash leverages staking to run Masternodes.

#1 Ethereum

 What are Proof of Stake Coins: Ultimate Guide - Blockgeeks

Before we start, there is one thing that should be made clear Ethereum is currently not a Proof of stake coin, but it is a POW coin. Ethereum will eventually move on to Proof of stake  in its final stage. Ethereum’s Proof of stake implementation is called the “Casper Protocol.” Casper was created to mainly mitigate the biggest flaw in the Proof of stake algorithm – the “Nothing at Stake” problem.

What is the Nothing at Stake problem?

Consider the following situation:

What are Proof of Stake Coins: Ultimate Guide - Blockgeeks

In the diagram above we have the main chain (blue) which has been mined till block #53. However, there is a parallel branch originating from block #50 (red). What will happen if some malicious miners get together and keep mining on the red chain until it overtakes the blue one? All the transactions that have taken place in block 51, 52, and 53 will be instantly null and voided.

In a Proof of Stake system, this risk can be mitigated.

Suppose malicious miner Alice wants to mine on the red chain. Even if she dedicates all of her hash power to it, she won’t get any other miner to join her on the new chain. Everyone else will still continue to mine on the blue chain because it is more profitable and risk-free to mine on the longer chain.

Now, remember, POW is extremely expensive resource-wise. It makes no sense for a miner to waste so many resources on a block that will be rejected by the network anyway. Hence chain splits are avoided in a proof of work system because it will be extremely expensive.

However, things look a little different when you bring in Proof of Stake. If you are a validator, then you can simply put your money in both the red chain and blue chain without any fear of repercussion at all. No matter what happens, you will always win and have nothing to lose, despite how malicious your actions maybe.

This is called the “Nothing at Stake” problem, and this is something that Ethereum had to address. They needed a protocol that could implement POS and mitigate the “Nothing at Stake” problem.

Enter Casper Protocol

Casper is a POS protocol that has an in-built punishment mechanism. This is how it will work:

  • The validators stake a portion of their Ethers as a stake.
  • After that, they will start validating the blocks. Meaning, when they discover a block that they think can be added to the chain, they will validate it by placing a bet on it.
  • If the block gets appended, then the validators will get a reward proportionate to their bets.
  • However, if a validator acts in a malicious manner and tries to do a “nothing at stake,” they will immediately be reprimanded, and all of their stakes are going to get slashed.

Anyone who acts in a malicious/Byzantine manner will get immediately punished by having their stake slashed off. This is where it differs from most other Proof of stake protocols. Malicious elements have something to lose so it is impossible for there to be nothing at stake.

This means that validators will have to be careful about their node uptime. Carelessness or laziness will lead to them losing their stake. This property reduces censorship of transactions and overall availability. Along with all that, the “slashing” property also lends Casper a distinct edge over standard proof of work protocols.

The current state of Casper

There are currently two versions of the Casper algorithm that are being developed side-by-side:

  • Casper the Friendly Finality Gadget (FFG): Ethereum founder Vitalik Buterin is developing Casper FFG. FFG is a hybrid POW/Proof of stake consensus mechanism. The blocks are still going to be mined via POW and every 50th block is going to be a Proof of stake checkpoint.
  • Casper Correct-by-Construction (CBC): Vlad Zamfir heads Casper CBC. CBC enables Ethereum to derive Casper dynamically.

#2 EOS

What are Proof of Stake Coins: Ultimate Guide - Blockgeeks

EOS is aiming to become a decentralized operating system which can support industrial-scale dApps. Headed by Dan Larimer and Brendan Blumer, it is one of the most talked-about platforms in the crypto-space. Ethereum, as mentioned above, is currently using the POW protocol, which makes it very slow and unreliable. EOS plans to produce a platform that can potentially do millions of transactions per second. The way they are doing that is by using a unique form of the Proof of stake algorithm, called DPOS or delegated proof of stake.

How does DPOS work?

The standard proof-of-stake consensus algorithm follows the principle of a classic Nakamoto consensus. A majority of the entire network is taken for the consensus process. However, this can be a slow process as the network grows in size. In DPOS, delegates are elected from the available validators through a continuous approval voting system. These delegates will be in charge of the consensus process.

In EOS, these delegates are called “Block Producers.” In total, 21 block producers are elected from the list of validators. Anyone can participate in the block producer election. They will be allowed to produce blocks proportional to the total votes they receive relative to all other producers.

To summarize the main roles of the block producers:

  • Make sure that their node is always running and healthy.
  • Collect transactions into the blocks.
  • Validating the transactions by signing and broadcasting those blocks.
  • Maintaining the overall health and well-being of the network.

Why use DPOS?

As you can imagine, DPOS is much faster than POS simply because the nodes involved are a lot less. EOS has achieved a high of 3,996 transactions per second. The screenshot below also shows us that blocks get confirmed in EOS in just 0.5 seconds.

What are Proof of Stake Coins: Ultimate Guide - Blockgeeks 

The DPOS system doesn’t experience a fork because instead of competing to find blocks, the producers will have to co-operate instead. In the event of a fork, the consensus switches automatically to the longest chain.

What is TAPOS?

Transaction As Proof Of Stake or TAPOS is a feature of the EOS software. Every transaction in the system is required to have the hash of the recent block header. This does the following:

  • Prevents transaction replay on different chains.
  • Signals the network that a user and their stake are on a particular fork.
  • Prevents validators from acting maliciously on other chains.

EOS staking for resources

While EOS and Ethereum are both smart contract platforms, there is a fundamental philosophical difference between the two projects. Ethereum acts as a global supercomputer which rents out its power to developers to build their dApps. EOS, on the other hand, is built on an ownership model. Instead of paying rent for resources, you own them.

The moment you stake EOS tokens, you are given resources like Network Bandwidth, and CPU Bandwidth in return. Since RAM is a rare resource, you will need to buy it from the RAM marketplace. When you sell your resources like CPU and Network Bandwidth, you get back your staked tokens.

#3 Tezos

What are Proof of Stake Coins: Ultimate Guide - Blockgeeks

Tezos is a decentralized, self-governing smart contract platform co-founded by Arthur Breitman and Kathleen Breitman. The company is headquartered in Switzerland and raised a $232 million in an uncapped ICO in just two weeks, accepting contributions of both bitcoin and ether.