Transaction securing and verifying is a key element facilitating the functioning of the cryptocurrency system. Also known as crypto-mining, this process is carried out by stakers who check any transaction and receive a reward in the process.

Because the cryptocurrency is a fully automated domain, it is absolutely essential to check every single piece of information to make sure that invalid blocks do not enter a blockchain.

Two significant blockchain consensus algorithms are used to verify and secure transactions. The first type is the traditional Proof of Work (PoW) model and the second is a relatively new version called Proof of Stake (PoS).

It has gained a lot of attention lately after Ethereum decided to move from Proof-Of-Work to Proof-Of-Stake. It arose as a great alternative to tradition; a system of Proof-Of-Work. Being more energy efficient, it has made it an excellent choice with less time-consuming. Let’s have a quick view of Proof-of-Stake before heading on.

An important thing to note about Proof-Of-Stake is that in most cases at the time of launch the digital currency is created and its number remains fixed. Therefore, in the case of Proof-Of-Work, the validators do not receive cryptocurrency as a reward. Rather, they receive transaction fees as a reward.

ADVANTAGES OF PROOF-OF-STAKE

Since the edge of Proof-Of-Stake is over the Proof-Of-Work, it is becoming popular. Here are a few of the advantages it provides:

  1. Efficient energy – The reason why Proof-Of-Stake has become so popular is that it consumes less energy than Proof-Of-Work. In the case of Proof-Of-Work, an algorithm must be solved to add a block consuming about $ 1 million a day. Proof-Of-Stake, on the other hand, consumes less energy.
  2. No need to give too many coins – As there is less electricity consumption, there is no need to consume too much electricity, so you don’t have to issue too many coins to attract participants.
  3. Attacks will lead to loss rather than gain – The attack will end up losing wealth instead of gaining from the attacks. Because cheating leads to loss of coins in PoS, attacks become very expensive and thus prevent forking.

DISADVANTAGES

  • A 51% wealthy miner will own the network – A miner holding 51 percent of the total coins will always be selected as the leader with the PoS protocol. As a consequence, blockchain decentralization becomes pointless when the blocks are always created by a single node. Furthermore, a node is unlikely to own 51% of the total coins.

Moreover, several blockchains have protocols in place to avoid this. Coinage is one of those solutions. Where the tendency to be elected as the leader with time decreases or where the coin that is the staked validator becomes the leader the longest time.

Also, the coins should be at stake for a particular time period, normally a month, to gain the ability to discover new blocks. During this period, not only can the staked coins not be used otherwise, but they also earn their reward after the same. Furthermore, after the said period, the staked coins automatically expire and the user must go through the process again.

IMPLEMENTATION OF PROOF-OF-STAKE

As mentioned already, in order to validate the transaction, the user must show ownership of cryptocurrency. The more the number of coins; the promise is the likelihood that the transaction will be approved. In the form of transaction fees, they receive rewards.

The creator is chosen in a pseudo-random manner in the case of Proof-Of-Stake. The creator’s wealth becomes the selection basis. The number of coins or stakes is this wealth. Forged is used rather than minted in the case of Proof-Of-Stake. Users validating transactions and adding new blocks are known as forgers. It is mentioned earlier that in the form of the transaction fee, the user or validators receive the reward.

HOW DOES VALIDATION OF THE TRANSACTION HAPPEN IN PROOF-OF-STAKE

In this scenario, the forger must initially place their coins at stake in order to create a new block. This is similar to holding an escrow account, they lose their stake and their right to participate in any such future events in the event that the validator validates a fraud transaction. Only after they put up their stake can a forger participate in forging and can proceed with the validation process.

It does not really work with ICO and you can either start with Proof-Of-Stake at the initial cryptocurrency stage, you can either begin with an ICO, sell the pre-mined coins, or you can begin with Proof-Of-Work and then switch to Proof-Of-Stake, as done in Ethereum.

CURRENCIES USING PROOF-OF-STAKE

This system is currently being used in:

  1. BlackCoin
  2. Lisk
  3. Peercoin
  4. Nxt Coin
  5. Block Selection Methods

In the case of Proof-Of-Stake, it is necessary that we have a way of selecting the one that will forge the next block. Only by selecting them based on the account’s size will not be enough. A proper system must be in a place that will be beneficial in doing so. There are two ways to be fair when choosing the forger:

  1. Randomized Selection – In this case, the user with the lowest hash value and the size of their stake will be given the opportunity to select the next block.
  2. Coin Age-Based Selection – As the name suggests, the coinage determines the forger in this method.

COINAGE CALCULATION

The number of days that the digital currency user has held at stake * The number of coins at stake.

An important thing to note here is that for the coins at stake, the number of days should be at least 30 days. If it is lesser than 30 days, then the forger cannot take part in the validation.

There is a better likelihood of qualifying for users or forgers who have more coins at stake and have been holding them for a longer time.

The maximum stakeholder coin period is 90 days. It prevents participation from being dominated by users with a very old and significant stake. It provides all forgers a fair chance to take part in the validation process.

Peercoin uses age-based selection together with the method of random selection.

THE BOTTOM LINE

As we saw, the consensus algorithm for Proof of Stake is transforming the market for cryptocurrency in several different ways. It has strengthened the growing popularity of cryptocurrencies and their use by making the mining process way simpler and less demanding. In addition, by minimizing the threat of attacks it also made the process safer. There is no doubt that further enhancements in the PoS algorithm, as well as its traders, would play an important role in securing a prospective future for the cryptocurrency market.

This was a general Proof-Of-Stake summary and how it works. Several other methods that have come into being are a feasible way of adding new blocks. The goal behind it is to create a safe and secure digital currency transaction environment. In addition to creating equal opportunities for all to earn.

 

Keep reading our articles at www.nvestlabs.com to know more about cryptocurrencies and to get the latest updates…

 

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Asma
Blockchain Research Analyst at Nvest
I am a BE graduate, specialized in Computer Science. Currently, pursuing ME in Computer Networks from UVCE. Also, I am working as a Blockchain Research Analyst at Nvest.
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