Proof of Stake is one of the most common algorithms in worldwide digital money systems. It is based on a special algorithm.

A specific mechanism of the Proof of Stake algorithm

Proof of Stake (PoS) is a kind of base working algorithm for cryptocurrency platforms that was first applied in the PPCoin platform in 2012. Today this project is known to users as PeerCoin. The main principle is the “share”, or Stake, is used as a capability that determines the node with the right to get the next block when mining.

When using PoS nodes, information is hashed for searching results that are less than the specified value. In this case, the degree of complexity in each case is proportionally distributed and corresponds to the balance of a particular node. In other words, the Proof of Stake algorithm takes into account the number of coins in your account. This indicates the possibility of generating subsequent blocks by a node with a larger balance. The definition of PoS as a working scheme for mining attracts users with a small number of system requirements and also eliminates the possibility of computer resources wasting.

What is remarkable about the Proof of Stake algorithm

The Proof of Stake term means a special mechanism by which different digital currencies are negotiated. The PoS definition is an alternative to the Proof of Work algorithm, which is used in the Bitcoin platform. Also, it should be said that the main trump cards for this algorithm are the absence of large expenditures for computations, as well as low throughput for the possibility of obtaining a reward for mining blocks in mining.

This algorithm is based on the storage of all done operations in Bitcoin and other altcoins with a distributed database on the Blockchain network. The name of the Blockchain itself appeared due to the ability of the system to collect operations into special blocks – each of them refers to the previous one, linking like a chain. At the same time, each node participating in the network has its own Blockchain copy.

Synchronization of the nodes of the system operating on PoS is carried out through the P2P (peer-to-peer) network. Thanks to Proof of Stake it is possible to implement cryptocurrency in conditions of high security and confidentiality in order to avoid hacker attacks and fraudulent actions.

The system using the Proof of Stake method is usually based on the principles of decentralized management in the absence of a single center, which does not allow scammers to know exactly which version of the Blockchain is true. This is possible only by attracting very large computing powers, which does not justify the potential benefit in case of success.

The work of the Bitcoin network is organized in a way to ensure effective security. For this physically rare resources are required, represented by specialized equipment and significant energy resources. Such requirements make Bitcoin less efficient. PoS Mining provides real opportunities for users to receive rewards from the extraction of blocks while using available capacities and other resources. Features of Proof of Stake consist in the fact that instead of using large computing powers for successful cryptocurrency extraction, it is enough for the user to have a large share in the system itself, which guarantees to obtain a fair compensation in an amount, directly proportional to the size of the share.

The definition of the principle of the PoS algorithm can be given as follows: the greater your share in the system, the more likely your mining will be successful. The same goes for security since Proof of Stake works not only for mining but also for the safety of assets. If you have a decent number of tokens in your system, then you are interested in the absence of hacker intrusions in order to steal your funds. In addition, for the possibility of attack, the scammer must become the owner of an impressive share, which entails very high costs.

How PoS differs from PoW

Deepening into the consideration of the topic, what is Proof of Stake (PoS), it is useful to conduct its comparative analysis with a competitor and another leader – the Proof of Work algorithm. Cryptocurrency, functioning on the basis of PoW, is characterized by double expenditure. At the same time, this expenditure decreases with the growth of the volumes of the committed operations in the network and depends on the computing power that is available to hackers. To minimize the risk of double spending, users expect a specific number of transaction confirmations and use additional security mechanisms to reduce risks.

Common types of attacks for the two algorithms are such as “denial of service”, or DoS, and Sybil attack. The first is characterized by interruption of the normal network operation by overloading the nodes. To do this, many transactions of very low cost are often used simultaneously. The second of these attacks disrupts the system by creating multiple nodes that do not function correctly.

The degree of risk in these attacks depends both on the type of network reconciliation and on the protocol detailing. At the moment, properties that could reduce the sensitivity of the PoS algorithm to attacks relative to PoW, do not exist.

There is another kind of attack called “Selfish Mining”. The scammer publishes blocks selectively, which provokes a waste of capacity of other users of the network. Within PoS matching work, expensive resources do not participate in the process of creating blocks, this technique does not show efficiency for the algorithm. There is also no official confirmation of the effectiveness of Selfish mining for PoW.

The degree of risk in accordance with PoW can be predicted since it is possible to take into account the total hashing power of the system. The presence of a “state of health” is not typical for PoS. It manifests in following:

  • With uniform distribution of a cryptocurrency between participants, there’s still a possibility of attacks, based on branching of a network;
  • If there are users with large shares, there is a possibility of a network failure by applying censorship to transactions.

Pros and Cons of Proof of Stake

The application of the Proof of Stake algorithm provides the user with both advantages and disadvantages. Among the advantages of PoS should be noted:

  • The need for large amounts of assets to organize an effective attack, which makes it economically unprofitable;
  • If a hacker has a significant number of coins in the system, his funds are also at risk, as this violates the cryptocurrency’s stability.

Disadvantages of Proof of Stake are as follows:

  • The algorithm promotes concentration of large volumes of assets in the hands of one participant, which contradicts the principles of decentralized management;
  • When forming a user group with an impressive number of assets, it is likely that this group will dictate own rules of the game.

From the list of problems, it is also worthwhile to highlight Nothing-at-Stake, or an empty stake – it reduces the apparent stability of Proof of Stake and contributes to the drop in the rating of the algorithm among network users. A hacker can create a false fork through the use of imaginary resources. With the support of this event, other participants can lead to a double waste of assets and the rejection of specific transactions.

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