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Beginner’s Guide to the Proof-of-Stake Consensus Mechanism

Proof-of-Work, the mechanism to secure a decentralized network, was first introduced in the Bitcoin protocol in 2009. It was a revolution in its own right because of its ability to allow the flow of value and information over the internet without the risk of being attacked. Since then, Proof-of-Work or PoW has been implemented over various other protocols like Ethereum, Dash, Litecoin, and it has achieved great success.

But as it is always said, there are always trade-offs. To help secure a network, PoW asks for something in return, something that disincentives actors to work against it. In most cases, PoW requires vast amounts of investment in equipment and energy. The nodes running PoW must contribute massive amounts of electricity to secure the network. In June 2019, the energy required by the entire Bitcoin Network crossed the total energy need of the Czech Republic, and since then, the need has only gone up.

There was a dire need for an alternative mechanism that did not require as much power and, simultaneously, could secure the network. As a result, dozens of alternatives to the PoW mechanism have been introduced over the last decade. However, the consensus mechanism Proof-of-Stake has become the most widely favored out of the lot.

In a previous article, we discussed the differences in various consensus mechanisms that have been introduced. Today, we will dive deeper into the Proof-of-Stake consensus mechanisms and discuss the protocol’s innovations and advantages.

What is Proof-of-Stake (PoS)?

In proof of stake, besides incentivizing honesty, dishonesty is discouraged.” – Mohit Mamoria, Is Proof of Stake the solution?

Proof-of-Stake (PoS) is a typical computer algorithm through which some cryptocurrencies achieve their distributed consensus. In many ways, it is an alternative to the Proof-of-work algorithm by performing the same distributed consensus at a lower cost and more energy-efficient.

Proof of Stake takes away the energy and computational power requirement of PoW and replaces it with a stake. A Stake is an amount of currency an actor is willing to lock up for a specific time. In return, they get a chance proportional to their stake to be the next leader and select the next block, ultimately gaining the network reward.

PoS uses a time-stamping method to reach a consensus about a block by betting on it. This process alone opens a variety of criticisms. The betting amount is set to 10,000 ABCoin, and the average holder has about 20 ABCoin. So, anyone with the minimum betting requirement is bound to get richer with each block while the others wait for the chance to place a bet. Not everyone can afford to be a staker. It can be argued that over a period, the gap will become significant; therefore, the power to influence the ABCoin network will lie in the hands of a few, not unlike the current state of the Bitcoin PoW network.

Iterations of Proof Of Stake

You can also imagine many ice cream flavors if you think of Proof-of-Stake as ice cream. Different people favor different flavors; similarly, various projects tend to have different iterations of the PoS mechanism. They differ in algorithms, incentives, and pools, among other things.

These variations are not always apparent and could confuse when purchasing proof of stake coins. And so, we are here to clear the confusion for our readers, to help them make better-informed decisions.

Proof Of Stake (PoS)

Proof of Stake is a consensus method that replaces mining with token ownership. Instead of performing complex calculations, a token holder participates in block creation by “staking” their tokens, i.e., keeping them in a specific location and not spending them. The staker is then granted a reward, which could take transaction fees or a block reward based on the new tokens generated for blocks their stake helped create.

The chance that a staking token holder will earn those rewards is generally proportional to the number of tokens they are staking so that someone who takes more tokens has a higher chance of generating blocks and thus earns more. The staking requirement helps ensure that the people generating blocks have “skin in the game” — the more tokens they have, the more often they’ll earn rewards because their ownership makes it less likely that they’re trying to harm the network.

Projects Running on PoS

  1. Ethereum (Proposed)
  2. Neo
  3. Decred

Delegated Proof of Stake (DPoS)

Delegated Proof-of-stake, or DPoS, is a consensus mechanism that builds on the traditional PoS mechanism. Daniel Larimer created this consensus mechanism to solve Bitcoin’s perceived scaling problems. Since then, DPOS has proven to scale and is the consensus mechanism behind today’s three most active blockchains. It is similar to a democratic process where around 20 representatives are selected as the block producers for a blockchain.

The Delegated Proof of Stake (DPoS) consensus algorithm is considered a more efficient and democratic version of the primary PoS mechanism.

A DPoS-based blockchain counts with a voting system where stakeholders outsource their work to a third party. In other words, they can vote for a few delegates to secure the network on their behalf. The delegates may also be called witnesses and are responsible for achieving consensus during the generation and validation of new blocks.

Therefore, the DPoS algorithm creates a voting system directly dependent on the delegates’ reputation. If an elected node misbehaves or does not work efficiently, it will be quickly expelled and replaced by another.

Concerning performance, DPoS blockchains are more scalable, processing more transactions per second (TPS) than PoW and PoS.

Projects running on DPoS.

  1. EOS
  2. Tron
  3. Cardano
  4. Lisk

Hybrid PoS and PoW

A Hybrid Proof of Work and Proof of Stake system aims to capture the benefits of the respective approaches and use them to balance each other’s weaknesses.

A new wave of consensus models has been created to benefit PoW and PoS systems.

There is typically a requirement that these particular nodes hold a certain amount of the currency as collateral to demonstrate that they can be trusted to act in the network’s best interests, just like the rationale for Proof of Stake. Dash is the original masternode coin and refers to this model as Proof of Service. This article focuses on hybrids with a Proof of Stake component and will not consider the array of coins that emulate masternodes or Proof of Service.

Decred and Dash are among the few cryptocurrencies to utilize PoW and PoS in recognizable forms and merge them to produce a multi-factor or hybrid consensus mechanism.

Projects Running on Hybrid PoS and PoW

  1. Dash
  2. Decred

Masternodes based PoS

Masternode coins” are, in some senses, also hybrids in that they have a recognizable Proof of Work component that performs a similar role as in Bitcoin and an additional role for particular nodes.

Masternode is simply a cryptocurrency full node or computer wallet that keeps the full copy of the blockchain in real-time, just like you have full Bitcoin nodes, and is always up & running. But masternodes are considerably different in their functionality than normal nodes.

Due to their inherent inclusion of nodes into the incentive system, Masternodes can also be customized to carry out dozens of other features. For example, governance, Privacy, Voting, etc., can be carried out through the Masternodes. Thus, they effectively help in running the network.

Projects running on Masternode-based Proof Of Stake (PoS)

  1. PIVX
  2. ZCoin
  3. Divi Coin
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I hope this small guide helps our readers understand the intricacies and iterations of the Proof-of-Stake protocol and help them make better decisions.

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