The consensus algorithm
Proof of stake
Proof of stake is the consensus algorithm used by cryptocurrencies
to validate blocks. The system was initially suggested in 2011 and
the first cryptocurrency to implement it was Peercoin in 2012. The
main advantages of proof of stake are energy efficiency and
security. In a proof of stake system, the creator of the next block
is determined by a randomized system that is, in part, dictated by
how much of that cryptocurrency a user is holding or, in some cases,
how long they have been holding that particular currency. Instead of
computational power, as is the case in proof of work, the
probability of creating a block and receiving the associated rewards
is proportional to a user’s holding of the underlining token or
cryptocurrency on the network.
The randomization in a proof of stake system prevents
centralization, otherwise the richest individual in the system would
always be creating the next block and consistently increasing their
wealth and as a result their control of the system. The main
advantage of proof of stake, over a system such as proof of work, is
that it uses considerably less energy and as a result is more cost
effective. It is well documented that each Bitcoin transaction,
which uses a proof of work system, can require as much electricity
as an average Dutch household does in two weeks. This is both
ineffective and unsustainable.
In that regard proof of stake can be regarded as a superior
consensus protocol as it requires far less electricity to run.
Furthermore, as the proof of stake system is so much more cost
effective there is less of a need to release too many new coins as a
means of incentivizing miners to maintain the network. This helps to
keep the price of a particular coin more stable.
Proof of stake protocol is effective in not only encouraging
individuals to partake in the system but also preventing any
individual from controlling the network. In order to carry out a 51%
attack an individual or group would need to own the majority of
coins on the network.
Firstly, it would be extremely expensive to acquire enough coins to
get anywhere near doing so since many individuals would likely exit
the currency if a single party began buying everything, while others
would ramp up the price to discourage a hostile takeover.
Furthermore, it would be completely counterproductive to attack the
network as it would vastly decrease the value of the coins that the
attacker is holding. Essentially, the users with the highest stake
in a cryptocurrency have the most interest maintaining and securing
the network because any attacks would diminish the reputation and
price of the cryptocurrency that they hold.
However, proof of stake does have its downsides, one of them being a
“nothing at stake” problem. The issue occurs in the event of a
consensus failure when block-generators have nothing to lose by
supporting varying blockchain histories, preventing the conflict
The proof of stake consensus is particularly suited to resolving
the issue of Byzantine Fault Tolerance as all validators are
tracked by the network and have known identities, for example in
the form of a Lisk wallet address. As Byzantine Fault Tolerance
requires 2/3 of validators to be honest, keeping track of these
individual identities helps maintain a functional status quo.
Overall, the proof of stake consensus protocol is a robust system
that effectively and efficiently fulfills its intended purpose.
However, this has not stopped companies from modifying and improving