A consensus mechanism can be structured in a number of ways. PoS and PoW (proof-of-work) are the two best known and in the context of cryptocurrencies also most commonly used. Incentives differ between the two systems of block generation. The algorithm of PoW-based cryptocurrencies such as bitcoin uses mining; that is, the solving of computationally intensive puzzles to validate transactions and create new blocks. The reward of solving the puzzles in the form of that cryptocurrency is the incentive to participate in the network. The PoW mechanism requires a vast amount of computing resources, which consume a significant amount of electricity. With PoS there is no need for ‘hard Work’. Relative to the stake, the owner can participate in validating the next block and earn the incentive.
Block selection variants
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.
Coin age-based selection
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 multiplied by 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, it 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.[non-primary source needed]
Some authors[non-primary source needed][non-primary source needed] argue that proof of stake is not an ideal option for a distributed consensus protocol. One issue that can arise is the “nothing-at-stake” problem, wherein block generators have nothing to lose by voting for multiple blockchain histories, thereby preventing consensus from being achieved. Because unlike in proof-of-work systems, there is little cost to working on several chains. Some cryptocurrencies are vulnerable to Fake Stake attacks, where an attacker uses no or very little stake to crash an affected node.
Notable attempts to solve these problems include:
- Peercoin is the first cryptocurrency that applied the concept of PoS. In its early stages, it used centrally broadcast checkpoints signed under the developer’s private key. No blockchain reorganization was allowed deeper than the last known checkpoints. Checkpoints are opt-in as of v0.6 and are not enforced now that the network has reached a suitable level of distribution.
- Ethereum‘s suggested Slasher protocol allows users to “punish” the cheater who forges on top of more than one blockchain branch.[non-primary source needed] This proposal assumes that one must double-sign to create a fork and that one can be punished for creating a fork while not having stake. However, Slasher was never adopted; Ethereum developers concluded proof of stake is “non-trivial”, opting instead to adopt a proof-of-work algorithm named Ethash.[non-primary source needed]
- Nxt‘s protocol only allows reorganization of the last 720 blocks.[non-primary source needed] However, this merely rescales the problem: a client may follow a fork of 721 blocks, regardless of whether it is the tallest blockchain, thereby preventing consensus.
- “Cryptocurrencies and blockchain” (PDF). European Parliament. July 2018. Retrieved 29 October 2020.
the two best-known – and in the context of cryptocurrencies also most commonly used
- King, Sunny. “PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake” (PDF). Archived from the original (PDF) on 2017-12-11. Retrieved 2014-11-17.
- Thompson, Jeffrey (15 December 2013). “The Rise of Bitcoins, Altcoins—Future of Digital Currency”. The Epoch Times. Retrieved 29 December 2013.
- Andrew Poelstra. “Distributed Consensus from Proof of Stake is Impossible” (PDF).
- Vitalik Buterin. “On Stake”.
- “GitHub – ethereum/wiki: The Ethereum Wiki”. August 7, 2019 – via GitHub.
- “Resource exhaustion attacks on PoS”. University of Illinois at Urbana–Champaign. 22 January 2019. Retrieved 15 February 2019.
resource exhaustion attack affecting 26+ several chain-based proof-of-stake cryptocurrencies. These vulnerabilities would allow a network attacker with a very small(in some cases, none) amount of stake to crash any of the network nodes running the corresponding software