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Proof of stake

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Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of proof-of-work schemes. The first functioning use of PoS for cryptocurrency was Peercoin in 2012.

Description

For a blockchain transaction to be recognized, it must be appended to the blockchain. Validators carry out this appending; in most protocols, they receive a reward for doing so.[1] For the blockchain to remain secure, it must have a mechanism to prevent a malicious user or group from taking over a majority of validation. PoS accomplishes this by requiring that validators have some quantity of blockchain tokens, requiring potential attackers to acquire a large fraction of the tokens on the blockchain to mount an attack.[2]

Proof of work, another commonly used consensus mechanism, uses a validation of computational prowess to verify transactions, requiring a potential attacker to acquire a large fraction of the computational power of the validator network.[2] This incentivizes consuming huge quantities of energy. PoS is more energy-efficient.[3]

Attacks

PoS protocols can suffer from the nothing-at-stake problem, where validator nodes validate conflicting copies of the blockchain because there is minimal cost to doing so, and a smaller chance of losing out on rewards by validating a block on the wrong chain. If this persists, it can allow double-spending.[4] This can be mitigated through penalizing validators who validate conflicting chains[4] or by structuring the rewards so that there is no economic incentive to create conflicts.[1]

Variants

Variations of stake definition

The exact definition of "stake" varies from implementation to implementation. For instance, some cryptocurrencies use the concept of "coin age", the product of the number of tokens with the amount of time that a single user has held them, rather than merely the number of tokens, to define a validator's stake.[2]

Delegated proof of stake

Delegated proof of stake (DPoS) systems separate the roles of the stake-holders and validators, by allowing stakeholders to delegate the validation role.[4]

Implementations

The first functioning implementation of a proof-of-stake cryptocurrency was Peercoin, introduced in 2012.[1] Other cryptocurrencies, such as Blackcoin, Nxt, Cardano, and Algorand followed.[1] However, as of 2017, PoS cryptocurrencies were still not as widely used as proof-of-work cryptocurrencies.[5] The biggest proof-of-stake blockchains by market capitalization in 2021 were Cardano, Avalanche, Polkadot and Solana. Other prominent PoS platforms include Tron, EOS, Algorand, and Tezos.[6][7][8][9]

There have been repeated proposals for Ethereum to switch from a PoW to PoS mechanism.[10][11] In April 2021, the Ethereum Foundation announced that it planned to switch to a PoS system by the end of 2021.[11] This has since been pushed back to the second quarter of 2022.[12]

Concerns

Security

Critics have argued that the proof of stake model is less secure compared to the proof of work model.[13]

Centralization

Critics have argued that the proof of stake will likely lead cryptocurrency blockchains being more centralized in comparison to proof of work as the system favors users who have a large amount of cryptocurrency, which in turn could lead to users who have a large amount of cryptocurrency having major influence on the management and direction for a crypto blockchain.[14][15]

Energy consumption

In 2021 a study by the University of London found that in general the energy consumption of the Proof-of Work based Bitcoin was about 1,000 times higher than that of the highest consuming proof of stake system that was studied even under the most favorable conditions and that most proof of stake systems cause less energy consumption in most configurations. The researchers also noted that the energy consumption of different Proof of stake systems was divergent with permissioned systems that used less validators being more energy efficient then permission-less systems that don't. They also couldn't find the energy consumption of a proof of stake system on a large scale as such a system does not exist at the time of the report.[16][17]

In January 2022 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 emissions.[18]

References

  1. ^ a b c d Saleh, Fahad (2021-03-01). "Blockchain without Waste: Proof-of-Stake". The Review of Financial Studies. 34 (3): 1156–1190. doi:10.1093/rfs/hhaa075. ISSN 0893-9454.
  2. ^ a b c Tasca, Paolo; Tessone, Claudio J. (2019-02-15). "A Taxonomy of Blockchain Technologies: Principles of Identification and Classification". Ledger. 4. doi:10.5195/ledger.2019.140. ISSN 2379-5980.
  3. ^ Zhang, Rong; Chan, Wai Kin (Victor) (2020). "Evaluation of Energy Consumption in Block-Chains with Proof of Work and Proof of Stake". Journal of Physics: Conference Series. 1584 (1): 012023. Bibcode:2020JPhCS1584a2023Z. doi:10.1088/1742-6596/1584/1/012023. ISSN 1742-6596.
  4. ^ a b c Xiao, Y.; Zhang, N.; Lou, W.; Hou, Y. T. (2020). "A Survey of Distributed Consensus Protocols for Blockchain Networks". IEEE Communications Surveys and Tutorials. 22 (2): 1432–1465. arXiv:1904.04098. doi:10.1109/COMST.2020.2969706. ISSN 1553-877X. S2CID 102352657.
  5. ^ Li, Wenting; Andreina, Sébastien; Bohli, Jens-Matthias; Karame, Ghassan (2017). "Securing Proof-of-Stake Blockchain Protocols". In Garcia-Alfaro, Joaquin; Navarro-Arribas, Guillermo; Hartenstein, Hannes; Herrera-Joancomartí, Jordi (eds.). Data Privacy Management, Cryptocurrencies and Blockchain Technology. Lecture Notes in Computer Science. Cham: Springer International Publishing. pp. 297–315. doi:10.1007/978-3-319-67816-0_17. ISBN 978-3-319-67816-0.
  6. ^ Gecgil, Tezcan. "7 Cryptos to Buy for Their Potentially Profitable Partnerships". www.nasdaq.com. Retrieved 2021-07-23.
  7. ^ Ashworth, Will (July 13, 2021). "Solana vs. Cardano: Which Is the Better Ethereum Killer?". Investor Place.
  8. ^ Hissong, Samantha (July 9, 2021). "The Crypto World Is Getting Greener. Is It Too Little Too Late?". Rolling Stone.
  9. ^ Nguyen, Cong T.; Hoang, Dinh Thai; Nguyen, Diep N.; Niyato, Dusit; Nguyen, Huynh Tuong; Dutkiewicz, Eryk (2019). "Proof-of-Stake Consensus Mechanisms for Future Blockchain Networks: Fundamentals, Applications and Opportunities". IEEE Access. 7: 85727–85745. doi:10.1109/ACCESS.2019.2925010.
  10. ^ Sparkes, Matthew (2021-03-30). "NFT developers say cryptocurrencies must tackle their carbon emissions". New Scientist. doi:10.1016/S0262-4079(21)00548-0. Retrieved 2021-04-07.
  11. ^ a b Lau, Yvonne (2021-05-27). "Ethereum founder Vitalik Buterin says long-awaited shift to 'proof-of-stake' could solve environmental woes". Forbes. Retrieved 2021-05-29.
  12. ^ Wickens, Katie (25 October 2021). "'The Merge' to end cryptocurrency mining on gaming GPUs won't come until 2022". PC Gamer. Retrieved 13 December 2021.
  13. ^ "Crypto's Energy Guzzling Sparks an Alternative That Merely Sips". www.bloomberg.com. Retrieved 2022-01-22.
  14. ^ Chandler, Simon. "Proof of stake vs. proof of work: key differences between these methods of verifying cryptocurrency transactions". Business Insider. Retrieved 2022-01-22.
  15. ^ Lin, Connie (2022-01-21). "How to clean up crypto mining—and what's at stake if we don't". Fast Company. Retrieved 2022-01-22.
  16. ^ http://blockchain.cs.ucl.ac.uk/wp-content/uploads/2021/11/UCL_CBT_DPS_Q32021_updated-2.pdf[bare URL PDF]
  17. ^ "DLT Environmental Impact | UCL Blockchain". Retrieved 2022-01-23.
  18. ^ Bateman, Tom (2022-01-19). "Ban proof of work crypto mining to save energy, EU regulator says". euronews. Retrieved 2022-01-23.