The first thing that came to mind when I saw “PoS” was Point of Sale. EFTPOS is very popular in New Zealand and Australia but this has nothing to do with collecting payment.
It also has nothing to do with proving how much steak you can eat. That would be interesting though! PoS stands for Proof of Stake and is one way to achieve consensus on the blockchain.
Other ways to achieve consensus on the blockchain include (but not limited to):
- Proof of Work
- Proof of Activity
- Proof of Capacity
- Proof of Storage
Proof of Work (PoW) is currently the most common and is being used on the bitcoin blockchain. To understand more about PoW read this.
Proof of Stake (PoS) has made some noise in recent times in particular with Ethereum looking at moving away from PoW to PoS.
Before we look at PoS, first let’s see why we need it.
In a distributed, trustless computing network, there needs to be a way for a collection of machines to come to an agreement of facts.
In a blockchain, any participating node on the network can create a candidate block very easily by obtaining the relevant software and verifying the transactions according to preset rules.
The problem arises in deciding which candidate block will be selected as the next block in the blockchain. In PoW it is a race to solve a puzzle. That race is computationally expensive and actually quite wasteful. Electricity is consumed with no productive output. There must be another way of picking the next block in the blockchain. This is where PoS comes in.
What is Proof of Stake?
Proof of Stake (PoS) lets those who own part of the system help decide what the next block will be, based on the amount of stake they have in the system. The higher ones stake, the higher the probability that their candidate block will be the “chosen one”.
Let’s take an example. John, Mary and Sally have 3, 5 and 8 bitcoins respectively. Each of these bitcoins are colour coded for identification. Blue for John, red for Mary and green for Sally.
The chances of Sally “winning” and having her version of the block accepted as the next block on the chain is much larger than everyone else. Sally then gets a reward of say 1% of her stake.
Don’t the rich get richer?
Yes they do. Because the rich have more “skin” in the game and the probability of “winning” is linked how much they have at stake, the rich definitely get richer.
Coin age + reset
This is where coin age (not coinage) comes into play. This is the value of the coin multiplied by the age of the coin. That is, how long it has been in existence. This now changes the probability so that large stake holders who have had coins for a longer period of time, will have an even higher probability of “winning”.
However, once a stake of coins has been used to sign a block, the age of the coin resets back to zero. In the case of Peercoin, coins need to have aged by 30 days before they can be used to stake a claim and after 90 days the probability is at it’s highest. That is a coin that is 200 days old does not have any higher chance of “winning” than a coin that is 90 days old.
The main benefit of PoS is that it reduces the incentives for attacks because the attacker first would need a large stake in the system which could cost a lot of money and secondly, the attacker would be attacking himself!
Other benefits include no large consumption of electricity, reduced centralisation risk and potentially faster block generation times.
Potential Pit Falls
There are several potential draw backs to PoS.
- Centralisation (power in the ‘hands of the few’ with the very deep pockets).
- Nothing at stake problem
- Initial distribution problem
- Long range attacks
- Bribe attacks
- Coin age accumulation attacks
Proof of Stake is an interesting concept and on the surface seems a viable alternative. In practise however, pure PoS consensus have security threats that require additional mechanisms. An example includes Novacoin and Blackcoin that uses a hybrid PoW/PoS algorithm.
The whole ideal is to combat centralisation which can be currently seen with PoW and the bitcoin blockchain mining being dominated by China and also to reduce the consumption of enormous electricity performing meaningless tasks.