What is PROOF-OF-STAKE? What does PROOF-OF-STAKE mean? PROOF-OF-STAKE meaning - PROOF-OF-STAKE definition - PROOF-OF-STAKE explanation.
Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license.
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Proof-of-stake (PoS) is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. Unlike Proof-of-Work (PoW) based cryptocurrencies (such as bitcoin), where the algorithm rewards participants who solve complicated cryptographical puzzles in order to validate transactions and create new blocks (i.e. mining), in PoS-based cryptocurrencies the creator of the next block is chosen in a deterministic (pseudo-random) way, and the chance that an account is chosen depends on its wealth (i.e. the stake). In PoS cryptocurrencies the blocks are usually said to be forged (in the blacksmith sense of this word), or minted, rather than mined. Also, usually all the coins are created in the beginning and the total number of coins never changes afterwards (although there are some other versions of PoS where new coins can be created). Therefore, in the basic version of PoS there are no block rewards (e.g. as in bitcoin); so, the forgers take only the transaction fees.
Peercoin was the first cryptocurrency to launch using proof-of-stake. Other prominent implementations are found in ShadowCash, Nxt, BlackCoin, NuShares/NuBits, Qora and Nav Coin. Ethereum has planned a hard fork transition from PoW to PoS consensus. Both Peercoin and Decred hybridize PoW with PoS and combine elements of both consensus approaches in an attempt to garner the benefits of the two systems and create a more robust notion of consensus.
Proof-of-stake must have a way of defining the next valid block in any blockchain. Selection by account balance would result in (undesirable) centralization, as the single richest member would have a permanent advantage. Instead, several different methods of selection have been devised.
Peercoin's proof-of-stake system combines randomization with the concept of "coin age," a number derived from the product of the number of coins times the number of days the coins have been held. Coins that have been unspent for at least 30 days begin competing for the next block. Older and larger sets of coins have a greater probability of signing the next block. However, once a stake of coins has been used to sign a block, they must start over with zero "coin age" and thus wait at least 30 more days before signing another block. Also, the probability of finding the next block reaches a maximum after 90 days in order to prevent very old or very large collections of stakes from dominating the blockchain. This process secures the network and gradually produces new coins over time without consuming significant computational power. Peercoin's developer claims that this makes a malicious attack on the network more difficult due to the lack of a need for centralized mining pools and the fact that purchasing more than half of the coins is likely more costly than acquiring 51% of proof-of-work hashing power .
Proof of Work relies on energy use. According to a bitcoin mining-farm operator, energy consumption totaled 240kWh per bitcoin in 2014 (the equivalent of 16 gallons of gasoline). Moreover, these energy costs are almost always paid in non-cryptocurrency, introducing constant downward pressure on the price. Proof of Stake currencies can be several thousand times more cost effective.
The incentives of the block-generator are also different. Under Proof-of-Work, the generator may potentially own none of the currency they are mining. The incentive of the miner is only to maximize their own profits. It is unclear whether this disparity lowers or raises security risks. In Proof-of-Stake, those "guarding" the coins are always those who own the coins (although several cryptocurrencies do allow or enforce lending the staking power to other nodes).
Some authors argue that proof-of-stake is not an ideal option for a distributed consensus protocol. One problem is usually called the "nothing at stake" problem, where (in the case of a consensus failure) block-generators have nothing to lose by voting for multiple blockchain-histories, which prevents the consensus from ever resolving. Because there is little cost in working on several chains (unlike in proof-of-work systems), anyone can abuse this problem to attempt to double-spend (in case of blockchain reorganization) "for free".