The securing and verification of transactions is a fundamental factor which facilitates the functioning of the cryptocurrency system. Also known as crypto-mining, this process is performed by the stakers who verify any given transaction and earn a reward in the process of doing so.
Since the cryptocurrency is a fully automated domain, verifying every single bit of information is imperative to ensure that invalid blocks don’t get entry into a blockchain.
In order to verify and secure transactions, two major blockchain consensus algorithms are used. The first kind is the traditional Proof of Work (PoW) model and the second is a comparatively newer version known as Proof of Stake (PoS).
The primary attempt of this article is to break down the functioning of the PoS to inform the reader about things like Proof of Stake implementation, Proof of Stake validation, as well as, Proof of Stake attacks.
In this mining algorithm, a miner (node) has to put at ‘stake’ an amount of cryptocurrency to be able to verify a block. The number of blocks a single node can validate depends on the number of coins he/she is staking. In other words, you can only validate as many transactions as the number of coins you have in your wallet.
The core principle of the PoS consensus method is that more coins lead to more mining capacity in the hands of a node.
Now that we know what the PoS consensus algorithm is, let us move to the more necessary question of how it is implemented.
To begin with, it can be said that the PoS algorithm involves a voting process for the selection of the miner. The owner(s) of the original coin or network is required to randomly vote for a miner whom they assign the task of validating their transaction.
Depending on the blockchain’s requirements, a miner must have a minimum amount of coins in their bound wallet to be able to qualify as a node. Once chosen, the miner is required to deposit a number of coins into a "staking wallet”. This amount is used as the reference point to determine the node’s mining capacity.
For instance, if a miner as 10% of the total number of coins on the blockchain, he/she can validate and earn rewards for only 10% of the transactions. Owing to this requirement, at times, stakers pool their coins in order to mine high-value blocks and then share their rewards. Obviously, mutual trust is a pre-requisite for such pooling practices.
The development and, also, the growing popularity of the PoS method is due to the fact that it has helped the cryptocurrency market to overcome some of the major issues posed by the traditional PoW algorithm.
First, the PoS method has significantly reduced the need for highly complicated machinery, which was required for mining under the PoW consensus algorithm. Consequently, it has made the entire process of mining much more accessible, as well as, cheaper.
Second, by making use of the ‘number of coins’ as the determining principle for mining capacity, the PoS algorithm has simplified the mining process.
Third, since the PoS method isn’t hardware-dependant and doesn’t involve appendages like the ASICs, it has minimized the risks of depreciation of the investments made in the system. Presently, the only way in which the value of the initial investment may be reduced is by a fluctuation in the trading rates.
Fourth, there has been a massive reduction in the overall power consumption of the process, leading to obvious environmental benefits.
Fifth, the PoS system provides a major relief to the traders in the cryptocurrency market from the ever-increasing rise of the 51% attacks under the PoW framework.
Owing to the number of coins equals mining capacity principle, users have often raised concerns regarding a specific kind of Proof of Stake attacks. It has been feared that this approach to mining capacity determination will lead to a rise in the monopoly in the market as the rich will always be in a better position to mine new blocks.
Although the concern is very much valid, the PoS algorithm is not devoid of the remedies for the same. One of the most effective ways in which this is checked is the aging of the coins.
In order to gain the ability to discover new blocks, the coins must be at stake for a specific period of time, usually a month. Not only can the staked coins not be used otherwise during this period, but they also earn their reward only after the same. Moreover, the staked coins automatically expire after the said period and the user has to go through the process again.
As we have seen, the Proof of Stake consensus algorithm is transforming the cryptocurrency market in many different ways. By making the mining process way simpler and less demanding, it has enhanced the growing popularity of the cryptocurrencies and their usage. Moreover, it has also made the process safer by reducing the threat of attacks. It is beyond doubt that further enhancements in the PoS algorithm would play a major role in securing a prospective future for the cryptocurrency market, as well as, its traders.
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