Proof of Stake – Everything There Is To Know

What is A Proof-of-Stake?

An incorporated method that maintains the integrity of a cryptocurrency, preventing users from printing extra coins they didn’t earn is how we can define a Proof-of-stake. Bitcoin uses proof of work and Ethereum migrated to proof-of-stake to make the platform more scalable and reduce the network’s energy consumption.

Called “consensus mechanisms,” both proof-of-work and proof-of-stake are the methods by which a blockchain maintains its integrity. The “double spending” problem of digital money is addressed by consensus. The entire system would become undermined if there were any way the user of a cryptocurrency could spend their coins more than once. The currency would be worthless.

A proposed alternative to Proof of Work is Proof of Stake. Proof of stake is built structured and modeled in such a way to attempt the provision of consensus and double-spend prevention like proof of work (see “main” bitcoin talk thread, and a Bounty Thread). Proof of Stake alone is considered to be an unworkable consensus mechanism because creating forks is costless when you aren’t burning an external resource.

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Proof of Stake1

A member named Quantum Mechanic was probably the first to propose the model. Depending on the work done by the miner with Proof of Work it comes down to the probability of mining a block (e.g. CPU/GPU cycles spent checking hashes). The amount of Ethereum a miner holds are taken into account with Proof of Stake, the resource that’s compared to equalize the value – someone holding 0,5 % of the Ethereum can mine 0,5% of the “Proof of Stake blocks”.

Methods alone, based on Proof of Work, some consider that might lead to low network security in cryptocurrency with block incentives that decline over time (like bitcoin). The Tragedy of the Commons is responsible for this occurrence as well as the Proof of Stake as one way of changing the miner’s incentives in favor of higher network security.

Proof of Stake Motives
  • Increased protection from a malicious attack on the network is what a proof-of-stake system might provide. Two sources offer additional protection:
  • Much more expensive would be to execute an attack.
  • Reduced incentives for the attack. A near majority of all bitcoin shall be in the attacker’s possession. Hence, the attacker would suffer severely from his attack.
  • Proof of stake system would result in lower equilibrium transaction fees when block rewards are produced through transaction fees. Relative to alternative payments systems, lower long-run fees would increase the competitiveness of bitcoin. Due to vast reductions in the scale of wastage of resources intuitively reduced fees can happen.
The Monopoly Issue

Let’s imagine a scenario where a single entity (hereafter a monopolist) takes control of the majority of transaction verification resources. Having these resources in his control he could use them to impose conditions on the rest of the network. The monopolist could choose to do this, such as double spending or denying service. Confidence in bitcoin would be undermined and bitcoin purchasing power would collapse if the monopolist chose a malicious strategy and maintained his control for a long period. Otherwise, excluding all other transaction verifiers from fee collection and currency generation, without trying to exploit currency holders in any way the monopolist could choose to act benevolently. He would refrain from double spending and maintain service provision to maintain a good reputation. Keeping the confidence in Bitcoin, in this case, could be maintained under monopoly since all of its basic functionality would not be affected.

As potentially profitable, both benevolent and malevolent monopolies are a good opportunity for easy profit seekers. Hence there are reasons to suspect that an entrepreneurial miner might attempt to become a monopolist at some point. Attempts at monopoly become increasingly likely over time due to the Tragedy of the Commons effect.

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Proof of Stake Has A Way To Deal With Monopoly Issues

Under proof-of-stake monopoly is still possible. However, two reasons make proof-of-stake more secure against malicious attacks.

The first reason is that the establishment of a verification monopoly with proof-of-stake becomes more difficult. As I write, a monopoly over proof-of-work can be achieved by an entrepreneur that would invest almost 10 million USD in computing hardware. Because other miners will exit as difficulty increases, the actual investment necessary might be less than this. That is why it is difficult to predict exactly how much exit will occur. In the face of extremely large purchases, if the price remained constant (unlikely), such an entrepreneur would need to invest at least 20 million USD to obtain a monopoly under proof-of-stake. And eventually, the entrepreneur would likely need to invest several times this amount since such a large purchase would dramatically increase the bitcoin price. According to these standings and calculus, a proof-of-stake monopoly would be several-fold more costly to achieve than a proof-of-work monopoly. As time passes, the comparison of monopoly costs will become more and more dramatic and the difference more prominent. The bitcoin’s mining rewards ratio to market value is programmed to decline exponentially. After this occurs, a proof-of-work monopoly will become easier and easier to obtain, whereas obtaining a proof-of-stake monopoly will become progressively more difficult as more of the total money supply is released into circulation.

The second reason and perhaps the more important one is that a proof-of-stake monopolist exactly because of his stake in Bitcoin is more likely to behave benevolently. So, the final decision can be a benevolent monopoly. In this case, all the currency transactions proceed normally. However, all transaction fees and coin generations are earned by the monopolist. Consequently, other transaction verifiers are shut out of the system. Moreover, bitcoin might retain most of its value in the event of a benevolent attack since mining is not a source of demand for bitcoin. Regardless of whether the attack occurs under proof-of-stake or proof-of-work earnings from a benevolent attack are similar. Profit from bitcoin’s destruction in a malicious attack is the outside opportunity that allows the attacker to reach his goal (simple double-spends are not a plausible motivation; ownership of a competing payment platform is). Bitcoin-specific investments which are necessary for the attack are the attacker’s costs related to losses later on. The purchasing power of bitcoin falls to zero which can be caused by a malicious attack. The proof-of-stake monopolist, under such an attack, will lose his entire investment. On the other hand, a malicious proof-of-work monopolist will be able to recover much of their hardware investment through resale. Important to remember is that the proof-of-stake investment is much higher when compared to the necessary proof-of-work investment. Hence, the costs of a malicious attack under proof-of-work are several-fold lower. Malicious attacks, therefore are more likely to occur because of the low costs.

Long-run Transaction Fees Considerably Decreased With A Proof of Stake Over Time

To verify transactions and establish competitive market equilibrium, the total volume of transaction fees must be equal to the opportunity cost of all resources used. Proof-of-work mining and opportunity cost can be calculated as the total sum spent on mining electricity, mining equipment depreciation, mining labor, and a market rate of return on mining capital. Equipment depreciation costs are likely to dominate. Electricity costs, returns on mining equipment. It will be exceptionally easy to monopolize the mining network if these costs are not substantial. To prevent monopolization onerous fees are necessary, possibly more than the 3% fee currently charged for credit card purchases. Opportunity cost can be calculated as the total sum spent on mining labor and the market interest rate for risk-free bitcoin lending, hardware-related costs will be negligible when it comes down to a pure proof-of-stake. Interest rates on risk-free bitcoin-denominated loans are likely to be negligible since bitcoins are designed to appreciate over time due to hard-coded supply limitations. Therefore,  the labor involved in maintaining bandwidth and storage space needs to be compensated by the total volume of transaction fees under pure proof-of-stake. The associated transaction fees will be exceptionally low. Despite these exceptionally low fees, a proof-of-stake network will be many times more costly to exploit than a proof-of-work network. Expenditure equal to about one year’s worth of currency generation and transaction fees is how approximately a proof-of-work network can be exploited. On the contrary, exploitation of a proof-of-stake network requires the purchase of a majority or near majority of all extant coins.

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Implementation

How to implement PoS currently a few distinct proposals circulate.

Mixed Proof-of-Stake and Proof-of-Work – Cunicula’s Implementation method
Note

For the older implementation check the page history. My description will be updated with a new system which I believe to be much more secure. This new system provides extremely strong protection against PoW attacks, both double-spends, and denials of service and it is significantly improved and the new version of Coblee’s Proof of Activity proposal. If PoW attackers also have a substantial (but nonmajority) stake it would be impenetrable. To maintain full nodes it provides strong incentives. Coin owners who fail to maintain full nodes support the system through taxes. Coin owners who maintain full nodes get also a percentage by the redistributed tax revenue. The key element providing security in the system would be the maintenance of full nodes.

The long-term maintenance of the system is the focus of the discussion. PoW mining and IPO mechanism can execute the initial distribution of coins, or a more complex scheme that allows initial coins to be distributed to both PoW miners and businesses voted for by coin owners. It is confusing to discuss the issue of initial distribution and the long-term maintenance because they are is separate and diverse methods and approaches.

Terminology

Voluntary Signatures – A random auditing process may generate voluntary signatures. Keys are selected for auditing based on random selection during the mining of blocks. A public key owner is running a full node and signatures provide public evidence for that. A private key remains active if it Passes the audit.

Active Keys – If they appear in the blockchain public keys can become active especially if they have a balance of at least one full coin. This is by default. Public keys provide voluntary signatures when randomly audited remain active. Signing PoW blocks and mining PoS blocks and also participation in lotteries are eligible for active public keys. This is remunerative. Dead private keys are in practice public keys that fail to provide signatures.

Dead Keys – Lottery eligibility is lost for keys that have failed to provide signatures. By default, keys that have balances of less than 1 coin are considered dead. PoS blocks are no longer available for mining for dead keys. However, these dead keys can still be used to generate transactions. Mandatory fees levied on coins sent by dead keys are how network maintenance is supported primarily. The key becomes active provided that it retains a balance of at least 1 coin after coins are sent using a dead key.

Mandatory Signature Sequence – A sequence of 5 randomly selected active keys are signed for a PoW block to be valid and enter the blockchain. A PoS block would be mined by the fifth signatory in the sequence.

PoS block – Without any PoW submission at all, the fifth signatory of a PoW block must mint his block. A PoS block is how this block is called.

Coin-age – The age of transaction inputs is defined as Coinage. The average age on the coins times the number of coins sent is defined as Coinage. Age is measured in blocks. Whenever a coin provides a signature no matter if it is mandatory or voluntary signature age is reset to 1 block. Mandatory fees are calculated with the metric Coin-age.

Demurrage Fee – Demurrage tax on sent inputs is how Chain Security is primarily supported. As measured in coin-years, this tax is proportional to the average input age. As a reasonable fee, we suggest 5% per coin-year. Simply by remaining active, active keys can avoid demurrage fees. Thus the actual fee generation will be much lower than 5% per year. Demurrage must be collected from dead keys. What motivates activity and engagement is the opportunity to evade demurrage.

Optional Fee – To ration block space fees are used in general. Transactions with high fees are selected and prioritized by blocks. To motivate transaction inclusion, the user can add an optional fee to his transaction If demurrage fees alone are insufficient.

Fee Fund – Rather than being distributed directly to miners, both optional fees and demurrage fees enter a fund. Fees are immediately included in the fund, so there is a weak incentive to include high fee transactions in blocks. A distribution equal to 0.01% of the accumulated fund is what the PoW miner receives. 0.1% is also dedicated to the first four mandatory signatories. 0.1% is allocated to the PoS block miner as well, but his takings will differ slightly because the fund is updated based on transactions included in his block. The use of a fund reduces volatility in mining rewards.

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Root Private Key – Full spending and signing authority is awarded to the root private key. This key should be kept as an offline backup to guard against theft especially when significant balances are held.

Stake Signing Key – Delegation, signing, and sending authority to one other private is allowed for all Private Keys. The delegated key has limited authority to send coins and can sign blocks. Two positive constants, t, and k determine the authority to send coins. The stake signing keys’ spending authority is limited by the following transaction rule:

             Change Returned to Public Key >= all coins sent to other addresses * {max(k,k*(t/coin-years on public key)}
             k=9 and t=1/12 are suggested as possible parameters. For the stake signing key to spend up to 10% these parameters allow the total key balance per month. 10% is the max value at risk in event of theft of                 
             this key. Holders of large balances zero-out their coin-age frequently via mining and faceless theft risk. The large balance holder will only
             risk being able to spend up to 2.3% of their balance per week and will only lose 2.3%, if this occurs once per week, for example, 
in the event of theft. Once the theft is detected, all remaining coins can be moved to a secure computer using the
             root private key.
The Process Of Mining

1) When the work difficulty target is met a Block is mined. For 1 PoW block to arrive every 10 minutes, the difficulty target needs to be periodically adjusted.

2) Consecutively, the hashing of work submission happens 10 times. An individual unspent output in the blockchain is mapped with each consecutive hash. Drawing two sets of five lottery winners is an example of that. To mandatory signatures is where the first five hashes map to, and the final five hashes map to voluntary signatures.

3) The block can potentially be valid if the mandatory signatures map to active public keys [see Terminology]. If this is not the case, the block is invalid and must be discarded.

4) The PoW miner transmits the following hash to the network: {work submission; hash(his block, the previous valid block)} if he finds a potentially valid block.

5) The block is relayed through the network when the work submission meets the difficulty target and maps to active signatories. On the contrary, the message is dropped as spam.

5) This hash is sequentially signed and transmitted by the first five selected signatories as {work submission; hash; sig 1; sig 2; sig 3; sig 4; sig 5}

6) The final signatory publishes the PoW block and also his own PoS block only after the mandatory signature sequence is complete.

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7) Map to voluntary signatures is done with the final five hashes. These voluntary signatures can be inserted into any block within the next 6 blocks as special transactions. These transactions do not require fees.

9) Go to step 1

Note: With the attempt to collect five signatures and generate PoW/PoS block pairs this process is simultaneous so that multiple block hashes can circulate in the network. Orphaned block pairs are the ones that lose this race are.

Standard attack vectors and their Infeasibility

All types of PoW attacks are computationally infeasible unless attackers own a large share of the stake. In general, two types of known attacks exist: 1) Double-Spend 2) Denial of Service. Consideration of exact statistics is not particularly interesting because the numbers are so favorable.

1) Double Spend.

Double spending relies on secrecy. A PoW miner must select his 5 of his public keys in the lottery in order to mine blocks in secret. The probability of doing that If the PoW miner owns a share 0<s<1 of all coins, a block meeting the difficulty target will select the miner’s coins is (1/s)^5. 1 out of 10 billion blocks will satisfy this criterion for s=0.01. It is not practical to privately mine at a rate 10 billion times faster than all other miners combined even for extremely small hash aggregate rates. For s=0.1, 1 out of 100,000 blocks will satisfy this criterion. (i.e. the attack still requires approximately 99.999% of all hashing power). For s=0.5, the attacker will succeed if he controls 51% of the aggregate hash rate.

2) Denial of Service

An attacker who mines publicly could simply produce empty PoW blocks. However, this would fail to deny service. 50% of all blocks are randomly mined via PoS. The attacker cannot force the PoS miners to produce empty blocks. Therefore he cannot deny service regardless of how much hash rate he controls.

Long-term Chain Evaluation

1) А simple sum of block difficulty, just as in bitcoin is how we base the comparison of two long chains.

2) There is no reason not to sign attack chains is one criticism of PoS. However, many stakeholders will have dead signatures in a long-secret chain. Not being able to sign the main chain these dead stakeholders will not be in a favorable position to attack the chain. There would be a strong incentive to make sure the main chain wins because the attack chain will impose demurrage fees on them.

Struggles to Maintain full nodes   

To maintain full nodes this system introduces powerful incentives. For the maintenance of a full node, there is a lack of incentive and this is a serious issue in the bitcoin system that many practitioners argue.

1) Even if all public keys remain active, a steady flow of transactions will generate some fees. Active keys must be maintaining full nodes. The voluntary signatures which prove their activity, on the contrary, could not be provided. In this case, even very weak incentives are sufficient. It is not necessary to motivate additional participation if almost all keys are associated with active nodes.

2) Becoming inactive may be the decision of some public keys and this is costly for them. A loss of 5% yearly will be suffered from their balance for as long as they remain inactive.

3) From inactive public keys, the active public keys constantly capture revenue. As participation falls this means that the incentives to remain increase dramatically. 2.5% of coins per annum will be captured in total when 50% of public keys maintain full nodes. Annually, this equals a return of 2.0%. As discussed in point 2, the alternative, inactivity, yields an annual return of -5.0%. Incentive level and participation rate according to our considerations are at a reasonable degree. Now let’s imagine a different scenario where only 10% of public keys maintain full nodes. Afterward, of all extant coins, this 10% will capture 4.5%. An annual return on participation equal to 45% will be received in this way. Even if nodes are quite costly to maintain, this is a very strong incentive and is almost certain to be sufficient. All in all, 4.95% of all extant coins will be distributed to this 1% each year if only 1% of coins participate. A weekly return on the participation of 3% is expected with this, a pirate Ponzi scheme level return. The levy on dead coins could be increased to exceed 5% per annum if these incentives are inadequate to support a healthy network of full nodes (which seems unlikely to us).

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4) To justify running their node many people will not have enough coins. To store their limited spend key such individuals will likely use an online banking service. Users will receive interest in exchange for managing their keys.

5) Dropping out of participation would be maybe more preferable for Other individuals. These individuals are still welcome to use the network but must face a wealth tax of 5% per annum to compensate for the security risk created by their behavior.

Blockchain Metadata Storage

Data should be extracted from the blockchain in a readily accessible database that is updated with each block in order to facilitate the system. Only public keys which control at least 1 coin shall the database incorporate. Dead by default are considered keys with balances less than 1 coin. To create limited stake public keys is not allowed for these low-value public keys. The limited stake public key associated with the root key is invalidated if a public key balance drops below 1 coin.

The database would look like this:

Public Key (ordered list) Linked Stake Public key (if any) Balance Cumulative Balance Active? Coin-age (in years)
AAs1110.03
BBs2.53.500.1
CCs36.510.2

Public keys and delegated limited stakes have records that are kept and maintained by the blockchain. For easy access, these should be put in a simple database.

The winners of the lottery are determined by the usage of cumulative balance. (i.e. a uniform support draw is a definition for the lottery [0, total issued coins]) A unique lottery winner will be indicated with this, whose chance of winning is proportional to his ownership share.

Coin-age is updated as follows. If no send, Coin-age_t = Coin-age_t-1 + 1. If send, Coin_age_t = 1. If Coin_age_t = 1 – send and receipt of coins. If coins are receipted but no send, Coin_age_t  [Coin_age_(t-1)*balance_(t-1)+received coins]/balance(t)

In order to determine mandatory demurrage fees and to calculate spending limits for limited stake public keys, we use the metric Coin-age.

If a key fails to provide a requested voluntary signature it becomes 0 and active is 1 by default. 0 is an absorbing state.

Transaction Fees Beneficiaries and Losers

Starting from 0% to 5% of the total money supply is the variation of the total amount of demurrage fees collected annually.

The fee paid to PoW miners is the most burdensome in the system. A demurrage tax of between 0% and 0.1% per annum on all users of the system is imposed with this fee. PoW miners receive a 2% share of any optional fees paid to access scarce block space and this is as an addition to the demurrage tax. As a result of PoW mining fees, all coin owners are net losers. PoW fee payments are kept as low as possible in order to minimize costs to coin owners. Larger fees for PoW miners are unnecessary since large hash rates play only a tiny role in security.

Transfers of revenue from one private key to another would be another demurrage fee. Keys can be net beneficiaries of these transfers or net losers. Together, these fees do not make coin owners better or worse off. Their effects are neutral. Nevertheless, separately, these fees do create winners and losers. Infrequent spending by Active users allows them to gain from the system. Very likely to gain from the system as well as an active user with average spend frequency, but only by a small amount. A probable loss from the system is expected for an active user as well that spends very frequently on the system. The system is built in such a way as to make dead users lose. A failure to maintain an active node is the policy serving as a punishment and giving these users a loss in their assets.

Delegated Proof of Stake

Similar to PoW mining The Delegated proof of stake closely resembles the pooling of stakes. The partaking users are pooling their stakes, certain amounts of money, blocked on their wallets, and delegated to the pool’s staking balance instead of computing powers, and according to the proof of share principle.

The network periodically selects a pre-defined number of top staking pools (usually between 20 and 100), based on their staking balances, and allows them to validate transactions to get a reward. According to their stakes with the pool, the rewards are then shared with the delegators.

This principle allows increasing the decentralization and minimizing the possibility of attaining 51% of staking power by any of the pools, as such pool will be considered insecure by the users, and they would withdraw their stakes.

Which cryptocurrencies use proof of stake? 

The most popular cryptocurrencies with increased pace and a growing number use some variation of the PoS protocol. Here’s a partial list:

  • Cosmos (ATOM)
  • Cardano (ADA)
  • Polkadot (DOT)
  • Solana (SOL)
  • VeChain (VET)
  • Tezos (XTZ)

A variety of different tasks is what these networks aim to accomplish. 

  • Much like Ethereum, Cardano and Solana are focused on providing smart contract functionality. 
  • Different blockchains can communicate with each other with the Cosmos’ help. 
  • The creation and trading of security tokens are allowed through the design and architecture of Tezos

Because there is no “mining” involved in PoS, PoS networks often start with a “pre-mine,”. With the pre-mine, the entire supply of tokens is brought into existence at once.

Proof of stake vs. proof of work 

The same end goal, but by different means will be reached by the both PoS and PoW mechanisms. 

How the network achieves consensus for its blockchain is the main difference between networks that use PoS and those that use PoW.

“If it’s contrasted to proof-of-work.” PoS is easiest to understand according to Gould’s note. He defines PoW as follows: “in proof-of-work, the consensus is achieved by allowing a single participant to write the next block in the blockchain and be rewarded for their efforts in the native cryptocurrency of that blockchain.”

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Large amounts of computing power and electricity are effectively spent by Miners as they work on “solving a very hard cryptographic puzzle.” Requiring too much energy, having difficulty scaling or growing the network, and not providing enough throughput (the ability to process many transactions) are the main critics of this approach that are circulating often.

Proof of stakeProof of work
Requires validators to stake tokens 
Secured by the value of tokens
Energy-efficient
Requires miners to solve a cryptographic puzzle
Secured by computing power
Energy-intensive
Proof-of-Stake Benefits

Proof-of-stake offers some benefits:

  • Less energy consumption and monetary cost: Around $50,000 per hour for electricity which means $1.2 million per day or $36 million per month for Bitcoin mining is how much miners need to spend. All these costs can be cut out with proof-of-stake.
  • Special equipment not required: There is no need for better equipment or ASICs (application-specific integrated circuits)since you cut out all mining costs. 
  • 51% attacks are almost impossible: when a group of miners control over 50% of a blockchain’s hashing power and use this power to mess with the blockchain a 51% attack happens. Instead of this hypothetical group of miners, Proof-of-stake contributes 51%, protecting the blockchain.
  • Bad validators are avoided: If funds are locked up in the blockchain validators would make sure that they are not adding any wrong blocks to the chain because that would mean their entire stake invested would be taken away from them. 
  • Faster validation: faster validation of all new blocks created by a validator. 
  • Scalability: The Ethereum network splits its entirety into multiple portions called ‘shards’. This means that a unique set of account balances and smart contracts is created within each shard containing its independent state.

What differentiates this approach from the rest is that it incentivizes the honest miners and punishes the dishonest ones even though the rules of proof-of-stake seem more simplistic to implement they offer a better policy for users. Your stake will be gone forever if you have it on a malicious block. Anyone who doesn’t play by the rules will surely be punished. 

Proof-of-Stake Disadvantages

Depending on various mechanisms usually somehow relating to the amount of stake, the Proof of Stake algorithm selects the creator of the next block.

To elect block producers, who validate transactions and share the block reward they obtain with the community when it comes to a Delegated Proof of Stake network like EOS, users vote with their tokens.

Block producers can lose their power almost instantly if they act against the community because block producers are elected with tokens that represent votes.

Increased consequences of hacking and theft are harbored risks by Proof of Stake systems

To act in the network’s best interests and not to bring it down participants need to be properly encouraged and incentivized.

Depending on the variants used to define the stake in a network, some PoS networks have major weaknesses. If the number of block producers in a network is low the present block producers of some coins may wield an incredible amount of power and they get to validate all transactions.

Several PoS systems favor wealthy users and this is another major weakness – the more coins you stake, the more you can vote.

Nothing at stake

Finally, “Nothing at stake”,  is another issue in a Proof-of-Stake network. Two miners can produce a block almost simultaneously as a result of a time lag which is a rare occurrence in a PoW network. In this case, nodes need to reach a consensus on the valid block because this results in a temporary mix-up in the network. Consequently, miners need to bypass other opportunities and choose which version of the blockchain to spend their resources on.

What is important to note is that a validator might choose to continue working on multiple versions of the fork and forge new blocks, same as in the PoS system, forging of new blocks requires little resources. There is “nothing at stake” for users creating blocks as there are no opportunity costs for forging in a particular blockchain. To maximize the number of transaction fees they receive and as a logical consequence, users could mine on competing branches of a blockchain. Most PoS coins have additional protection mechanisms built into their protocol so to address this issue.

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Will Proof-of-Stake replace Proof-of-Work?

It is highly unlikely, Proof of Stake used by Digibyte, OmiseGO, ARDR, Rhoc, Stratis, Req, Dash, or Delegated Proof of Stake used by EOS, NEO, Ripple, Stellar) to replace the Proof of Work mechanism.

People who own the most coins receive the most potent voting power which also leads to centralization.  The wealthiest entities will have the most voting power, such as billionaires, banks, large companies, and government, also defeating the purpose of decentralization. Even though it has a lot of advantages it also has disadvantages compared to its adversary brother Proof-of-Work.

People with the most hashing power have the higher voting power when it comes to Proof of Work (used by Bitcoin, Litecoin, Bitcoin Cash, Dogecoin). With mining pools PoW faces the issue that leads to the centralization of miners, giving Bitcoin a single point of failure, since 1 company already almost owns 50% of the hash power (Bitmain), defeating the whole purpose.

So, both mechanisms and approaches are far from ideal and perfect, but they both solve some of the issues.

Proof of Stake Velocity (PoSV)

PoS has also variations as the name implies Proof-of-Stake-Velocity

In favor of the more energy-efficient PoS (with slight variations) it was developed for the Reddcoin project, which abandoned Proof of Work.

By giving incentives for users to keep their wallets online and to move the coins and stake often instead of hoarding and leaving the coins inert for long periods PoSV changes the way PoS works making the users more dynamic and interactive.

A non-linear function to compute coinage is used to achieve this.

Age is computed quickly in the first 7 days. After that, the coin age computation is reduced by a logarithmic function until time no longer plays a significant part in rewards.

With this approach users are incentivized more and more to move the coins or stake more, thus promoting more velocity and liquidity.

This analogy stems from the concept of velocity of money, which is a measure of the liquidity of a currency and how much of it is transacted daily.

Conclusion

Proof of Stake is a trending concept that allows everyday users to participate in securing a certain blockchain while earning passive rewards. With the transition of Ethereum to POS, this consensus mechanism is gaining massive exposure, but it’s still early to tell how successful this transition will be.  

Certainly, the aim to make things decentralized is even more demanded and expected and becomes an even bigger challenge as time passes. If you want to know more about how the principles of Decentralized Networks are established read our detailed wiki publishing Decentralized Exchange-A Comprehensive Guide

It is hard to tell how the result of these consensus mechanisms will look like at the end, except for the goals and the purposes they are aimed for decentralization as a priority.

All the consensus mechanisms are far from ideal and perfect they represent only the start and heralds of a totally new technology that we barely begin to understand adapt and spread.

So in the future, we must expect more advanced mechanisms that will serve their purpose not only in a better way but also completely.

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