Ultimate Proof of Stake (PoS) Definition

What is Proof of Stake? This is the second most common method of network operation in the field of cryptocurrencies. In short, new transactions are confirmed by the cryptocurrency owners themselves. Based on the algorithm, the user who creates a new block is selected. As a guarantee of accuracy, he puts part of his property into the system. Proof of Stake (PoS) does not reward new block creators for extracting a block. The motivation for them is transaction fees.

PoS first appeared in 2011 and was discussed at the Bitcointalk event. Peercoin then put it into practice as the first of the cryptocurrencies. Let's take a closer look at the issue.

How Proof of Stake works

To explain the Proof of Stake system, you need to be aware of a few basic differences from the Proof of Work system. We have already discussed this protocol and its extraction in the article Proof of Work (PoW). The main difference lies in the operation. Unlike PoW, we do not find classic miners here. There is no need for special hardware, such as graphics cards. All you need is ownership of the coin.

It looks strange at first glance. Coin holders, ie its users with their ownership, can participate in the operation of the network. Verification of transactions or individual blocks is performed by the selected network user. This single authorized currency holder is selected based on the algorithm on which the currency is based. Provides an amount in the appropriate currency. The deposit becomes a backup for later verification of other users' transactions.

Transaction verification fees

The amount invested from the user's property, specifically the creator of the new block, becomes a lever for verifying fake transactions. If the verification did not match and the individual fraudulently modified the transaction according to his own, he would lose his deposit. If everything goes smoothly, he will receive a reward that can be paid in two ways.

The first is the issuance of new coins ("minting"), which is an inflationary type of reward.

The second is the use of paid transaction fees ("forging"). The fees will be received by the confirming user - similarly to Proof of Work, the relevant miner will be rewarded for the extracted block.

Coins also have their age

"Coin age" is another interesting aspect of the Proof of Stake system. It's a kind of "age" of your particular coin. It can be calculated very logically. The decisive date is the date of the last expenditure or, if you wish, the last use of the currency. So, if I sent a certain number of peercoins to another user on June 1, then the deadline for their further use to verify transactions is calculated from that date. The period is set at 30 days.

We speak of the "coin age" for cryptocurrencies whose blockchain is operated by the Proof of Stake protocol. Here, the coin itself plays an important role, becoming the mediator of the formation of every other block on the blockchain of its cryptocurrency.

Everyone who operates the so-called masternode network must take this time limit (ie coin age) into account. You can read more about masternod below.

Ethereum wants to move from PoW to PoS

The Ethereum platform, with its ether currency, plans to undergo a very important change. In terms of total capitalization according to CoinMarketCap, Ethereum is now number two in the cryptocurrency industry. With its ERC-20 standard, the platform has contributed to the creation of many different tokens that have sprung up like mushrooms after rain.

In this article, however, we are primarily concerned with the mining protocol itself. Ethereum currently uses the Proof of Work system. Its operation is provided by hardware miners. That is set to change in the future. There are several reasons for the change. It is both about energy intensity and about constant changes and improvements. The platform is famous for its many layers of blockchain, which can be implemented on a basic, original layer.

If the developers want, they can play with this platform a bit and customize it to their liking. It is currently believed that moving to Proof of Stake would be an improvement for the platform. We are talking about the Casper protocol. As a reminder, specifically here, it would be a matter of providing a certain amount of ether (ETH) to confirm network transactions.

What are the benefits of Proof of Stake

The main advantages of the Proof of Stake system include low energy consumption. No need for complicated and energy-consuming graphics cards. Another plus is especially aimed at the honest ones. Dishonest users who would try to confirm a fake transaction in a new block can be negatively affected. The penalty in the Proof of Stake protocol is the removal of a pledge, which is a certain amount in the relevant currency.

Disadvantages of Proof of Stake

The Proof of Stake standard has this disadvantage in particular - the operation of the network cannot be operated by anyone who does not own the coins. Compared to Proof of Work mining, where you only need to have powerful equipment and a wallet of currency for payout, this is a big and fundamental difference. It would be an exaggeration to say that the system will only allow real enthusiasts in the field.

What cryptocurrencies use Proof of Stake

Proof of Stake therefore remains a very interesting protocol in the future. It is currently used, for example, in cryptocurrencies DASH, NEO, PIVX, Stratis, Reddcoin, Tezos, NavCoin, Nxt, Ardor or Cardano.

Masternode - Network Guardian

Masternode is a node that downloads all existing information from the blockchain to its operator's server. Part of the master node is a wallet on which the node operator stores a certain minimum amount of a given coin.

For example, in the case of the DASH cryptocurrency, it is 1000 units. Masternode must be run 24 hours a day, 7 days a week and assigned an IP address. It needs to be constantly online, because it is used in the Proof of Stake system to verify transactions. The amount of the operator's coins is entered as collateral for the transaction package. If a particular masternode is selected to write the transaction to the blockchain first. In addition to his inserted coins, he will also receive a reward for the work done according to the settings of the cryptocurrency protocol.

In addition to trading (coin trading) or valuation (holding a coin for a long time), the operation of a masternod belongs to frequent and popular investments.