What is Proof-of-Stake (PoS)?

4 min read

Curious about the debate around Proof-of-Stake vs. Proof-of-Work? Join us ask we ask our resident expert, Taylor Gerring. He gives us a rundown on Proof-of-Stake and it’s main differences from Proof-of-Work. Additionally, Taylor explores the effect each system has on cryptocurrency miners as well as their preferences!

What is Proof-of-Stake and how does it differ from Proof-of-Work?

When Bitcoin was introduced in 2008, it used a special trick for ensuring that miners/validators couldn’t just submit lots of false guesses to the network. To guard against this, all valid Bitcoin blocks must include a special number (known as a nonce) that can be used to calculate that the information is valid. This whole process of expending effort to find just the right number that makes the calculations work out is what has become known as “Proof-of-Work.” By contrast, “Proof-of-Stake” has to do with ensuring that the miner/validator has a staked some value to back the block.

What is a nonce?

A nonce is cryptographically arbitrary number. It ensures uniqueness and prevent rerunning of transactions. A replay attack occurs when transactions are ran more than once.

How many zeros does a Bitcoin Block need are needed to mine a Bitcoin block?

Actually, the number of zeros changes! This happens because the network needs a way to balance its release schedule. Bitcoin famously releases a new block every 10 minutes (on average). This is mediated by changing the number of zeros required to make it more or less difficult, based on the total amount of mining power. The number of zeros required can be altered to target a 10 minute block time, as new miners join the network.

What are the benefits of Proof-of-Stake? Why not stick with Proof-of-Work?

The goal of both Proof-of-Work (PoW) and Proof-of-Stake (PoS) is to operate as consensus mechanisms. Proof-of-Work is a clever way of randomizing a choice amongst all participants. In essence, all participants must solve a math problem, while searching for the aforementioned nonce. The first computer to solve the problem receives a reward.

By contrast, Proof-of-Stake can be a way of achieving group consensus by locking up some value against a proposed block. This mitigates issues of people firing as many “answers” as possible, just to be the first. Instead, with PoS you put something at stake, and if you submit an incorrect answer, you’ll lose your stake. It essentially works as an incentive to do correct work. So, profit for the group is a result of an agreement on a valid block, and any dissenters can be punished for their inaccuracy.

PoS and PoW sound like very different systems. Is anything the same?

One of the major reasons to consider alternative consensus algorithms is that Proof-of-Work consumes vast amounts of energy–more than some small nations! The hope with Proof-of-Stake is to reduce energy consumption of the network, while maintaining its secure properties.

As research and experimentation continues, it appears that PoW systems may be able to benefit from faster time to finality, or “confirmation.” Ethereum inventor, Vitalik Buterin, wrote about how both Proof-of-Work and Proof-of-Stake can be seen as consensus by bet.

When will the transition to Proof-of-Stake occur and how will it affect miners?

Some blockchain projects have already experimented with PoS, such as Nxt, PeerCoin, and to some degree, Dash. Ethereum plans to transition to Proof-of-Stake as part of their Metropolis and Serenity release cadence.

For the most part, miners using traditional equipment are not able to participate in the consensus process as before. The capital which would have been invested in electricity-consuming Proof-of-Work equipment would instead be locked up in the voting process. Instead of searching for a magic lottery number, as with Proof-of-Work, “stakers” cooperate on an answer to maximize their returns.

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Originally published May 16, 2017