Proof of Stake in Crypto: Security, Consensus, and More

Proof of Stake is a consensus algorithm used in cryptocurrencies to validate transactions and create new blocks. It's an alternative to Proof of Work, which is more energy-intensive.

The amount of cryptocurrency a user has, also known as their stake, determines how likely they are to validate transactions and create new blocks. The more cryptocurrency a user has, the higher their chances of being selected to validate transactions.

In Proof of Stake, validators are chosen through a random process, rather than competing with each other to solve complex mathematical problems like in Proof of Work. This approach reduces energy consumption and increases transaction speed.

In Tezos, a delegate is any user account registered as such, done by self-delegating with a delegation operation.

A delegate can be any account, user or smart contract, and can specify a delegate through a delegation operation. This operation can be changed or revoked at any time.

A delegate participates in consensus and governance in proportion to their baking power and voting power respectively. The voting power is the total amount of tez owned by all accounts that delegate to it.

The baking power is similar, but non-staked tez are weighted less than staked tez. Staked tez are security deposits that may be forfeited if the baker doesn't follow protocol rules.

Staked tez are weighted higher than non-staked tez when computing the baking power. Delegates and delegators may stake their tez.

To participate in consensus and governance, a delegate needs to be active and meet minimal balance requirements.

Here's a breakdown of how voting power and baking power are calculated:

Note that a delegate cannot stop self-delegating, and the change of delegate only becomes effective after CONSENSUS_RIGHTS_DELAY+2 cycles.

Proof of stake is a consensus algorithm that reduces the computational work needed to verify blocks and transactions. It uses the machines of coin owners to verify blocks, eliminating the need for hefty computing requirements.

In a proof-of-stake system, validators are selected randomly to confirm transactions and validate block information. This random selection eliminates the need for a competitive rewards-based mechanism like proof-of-work.

To become a validator, a coin owner must stake a specific amount of coins, such as the 32 ETH required by Ethereum. This stake serves as collateral, ensuring that validators have a vested interest in the integrity of the blockchain.

A delegate in a proof-of-stake system is any user account registered to participate in consensus and governance. They participate in proportion to their baking power and voting power, which are calculated based on the total amount of tez owned by all accounts that delegate to them.

The voting power of a delegate is the total amount of tez owned by all accounts that delegate to it, including the delegate itself. The baking power is similar, but non-staked tez are weighted less than staked tez.

To participate in consensus and governance, a delegate needs to be active and meet minimal balance requirements. They also need to stake their tez, which serves as a security deposit that may be forfeited if they don't follow the protocol rules.

Delegates and delegators may stake their tez, and staked tez are weighted higher than non-staked tez when computing the baking power. This incentivizes delegates to stake their tez and participate in the consensus process.

Here's a summary of the key factors that determine a delegate's participation in consensus and governance:

By understanding how proof of stake works, you can appreciate the benefits of this consensus algorithm, including faster consensus establishment and reduced computational work.

The 51% attack is a concern in proof of stake, but it's unlikely to occur because it's very expensive to control 51% of staked cryptocurrency.

In proof of work, a 51% attack happens when an entity controls more than 50% of the miners, but in proof of stake, a group or individual would need to own 51% of the staked cryptocurrency.

Ethereum's proof of stake model includes a mechanism to prevent 51% attacks, where honest validators can vote to disregard an altered blockchain and burn the offender's staked ETH.

Critics argue that proof of stake is less secure than proof of work, but the article doesn't elaborate on this claim, instead focusing on the security features of proof of stake.

In proof of stake, validators are incentivized to act in good faith because they can benefit the cryptocurrency and the network by doing so.

Proof of stake has several benefits over proof of work, including no need to consume large quantities of electricity to secure a blockchain, estimated to be over $1 million worth per day for Bitcoin and Ethereum.

This reduced electricity consumption means there's less need to issue new coins to motivate participants, potentially allowing for negative net issuance.

Proof of stake also opens the door to techniques that use game-theoretic mechanism design to discourage centralized cartels from forming and acting harmfully to the network.

A key advantage of proof of stake is reduced centralization risks, as economies of scale are much less of an issue. For example, $10 million of coins will get you exactly 10 times higher returns than $1 million of coins, without any additional disproportionate gains.

Here are some of the benefits of proof of stake:

Censorship can have severe consequences, including financial penalties for those who engage in it. In some countries, censorship is punishable by law, with fines and imprisonment being common penalties.

The World Wide Web Consortium (W3C) has a set of guidelines for online content, including rules against censorship. These guidelines are voluntary, but many websites and organizations follow them to ensure their content is accessible to everyone.

Censorship can also have a chilling effect on free speech, causing people to self-censor their opinions and ideas. This can lead to a lack of diversity in online content and stifle innovation and progress.

In some cases, censorship can be used as a tool for social control, with governments using it to silence opposition and dissent. This can be particularly problematic in countries with a history of suppressing free speech.

The negative consequences of censorship can be far-reaching, affecting not just individuals but also society as a whole. By penalizing censorship, we can help promote a culture of free speech and open communication.

Proof of Stake has several benefits over Proof of Work. One of the main advantages is that it doesn't require large amounts of electricity to secure a blockchain.

The lack of high electricity consumption means that there's no need to issue as many new coins to motivate participants, which could theoretically lead to negative net issuance.

Proof of Stake also opens the door to new techniques that use game-theoretic mechanism design to prevent centralized cartels from forming and acting harmfully.

This method reduces centralization risks, as economies of scale are much less of an issue.

In fact, having a larger amount of coins doesn't provide a disproportionate advantage, unlike in Proof of Work where a larger amount of coins can lead to better equipment and more rewards.

Here are some key differences between Proof of Stake and Proof of Work:

Liquid proof of stake (LPoS) is a system where anyone with a stake can declare themselves a validator, but small holders often delegate their voting rights to larger players in exchange for benefits like periodic payouts. This market is established where validators compete on fees, reputation, and other factors.

Token holders are free to switch their support to another validator at any time, which creates a dynamic and responsive system.

In Tezos, LPoS is used, and it's a great example of how this system can work in practice.

The benefits of LPoS include the ability for small holders to participate in the validation process and earn rewards, even if they don't have a large stake.

However, LPoS also means that small holders have to trust the larger players to act in their best interests, which can be a risk.

Here are some key characteristics of LPoS:

Energy Consumption is a significant concern when it comes to Bitcoin and other cryptocurrencies. In 2021, a study found that Bitcoin's energy consumption was about a thousand times higher than the highest consuming proof-of-stake system.

The energy consumption of proof-of-work based systems is a major drawback. This is why the Vice-Chair of the European Securities and Markets Authority, Erik Thedéen, called on the EU to ban the proof of work model in favor of the proof of stake model due to its lower energy consumption.

Ethereum's transition to proof-of-stake has been a game-changer. In September 2022, Ethereum transitioned its consensus mechanism from proof-of-work to proof-of-stake, cutting its energy usage by 99%.

Ethereum, the world's second-largest cryptocurrency in 2022, made a significant switch in September 2022 from proof of work to a proof of stake consensus mechanism system.

This major shift was the result of several proposals and some delays, marking a significant milestone in the evolution of proof of stake technology.

Peercoin, introduced in 2012, was the first functioning implementation of a proof-of-stake cryptocurrency, paving the way for others like Blackcoin, Nxt, Cardano, and Algorand.

As of 2017, proof of stake cryptocurrencies were still not as widely used as proof of work cryptocurrencies, but Ethereum's switch in 2022 brought a new level of attention and adoption to the proof of stake model.

Chain-based PoS attacks are a significant concern due to the low computing cost of adding blocks in the PoS scheme.

One type of attack is the "Short-Range" attack, also known as a bribery attack, where attackers rewrite just a small tail portion of the chain.

Rewriting a large portion of history is also possible in PoS, thanks to the low computing cost, allowing attackers to claim a necessary majority at some point back in time.

This can be achieved by financially inducing some validators to approve their fork of the blockchain, making bribery attacks even more enhanced in PoS.

The low computing cost of adding blocks in the PoS scheme also enables the collusion of once-rich stakeholders to claim a necessary majority at some point back in time and grow the alternative blockchain from there.

Proof of Stake offers a decentralized alternative to traditional centralization by using randomly selected validators to confirm transactions and create new blocks.

Proof-of-Stake (POS) eliminates the need for a competitive validation method, unlike Proof-of-Work (POW), which uses a competitive validation method to confirm transactions and add new blocks to the blockchain.

Randomly selected validators in Proof of Stake promote a more equitable distribution of power, allowing anyone to participate and contribute to the network.

This approach reduces the risk of centralization and censorship, creating a more secure and transparent environment for all users.

By using randomly selected validators, Proof of Stake ensures that the network remains decentralized and resistant to single points of control.