Proof of stake is a consensus mechanism used by blockchain networks to validate transactions that need to be added to the blockchain. The other main consensus mechanism used for validation is proof of work. Proof of stake systems try to address the weaknesses of proof of work systems.
The problem with proof of work is that when the activity on the network is scaled up, proof of work systems use up significant resources and creates pollution, waste, and even causes supply problems (such as high demand for GPUs) in a race for computing power.
This is because proof of work miners compete to solve a cryptographic puzzle to earn rewards. Every miner on the network is computing the same problem simultaneously, which is resource intensive. Also, many miners pool their processing power to get more consistent income. Large mining pools introduce the risk of one entity gaining control over a blockchain.
Proof of Stake Algorithm
Proof of stake is an alternative to proof of work. In proof of stake, we have validators, instead of miners, to validate and create new blocks. To become a validator, a node must deposit a certain number of tokens into the network as a form of guarantee.
Proof of stake systems randomly assign validators to validate and create new blocks and by doing so, the validators earn a reward. So instead of every node on the chain racing simultaneously to compute a block solution, only one node does the computation, but they have a “buy in” deposit to disincentivize dishonest behaviour. Once the node finds the solution, the solution is checked and confirmed by other nodes on the network before it is added to the blockchain.
Preventing 51% Attacks
In proof of work, it is possible for large mining pools to have control of more than 51% of the computing power or hash rate. When an attacker gains 51% of the network’s computing power in a proof of work system, the attacker can reverse transactions that need to be confirmed, double spend the coins, and prevent new transactions from happening.
With the case of Proof of Stake, the attacker will need to control more than 51% of the staking pool to start interfering with transactions. A significantly larger share of the staking pool is then needed to successfully double spend tokens and cause a hard fork. While this is not impossible, it is far more costly than getting more than 51% of the hash power on a blockchain. Most importantly, attackers in a proof of stake system stand to lose a lot more when they attack the network. Security breaches typically result in a fall in the price of the token, and since they are holding a large share, they will be penalised financially for the attack.
Let us look, by way of example, at what it takes to be a validator node on VeChain (VET), a proof of stake consensus network. To put it simply, there are two classifications of nodes on the VeChain network.
- Authority Nodes – These nodes validate transactions, group them and add them into the blockchain
- Economic Nodes – These nodes offer stability to the VeChain ecosystem and act as a distribution of power and privilege within the blockchain’s economy
To become an Authority Node, one will be required to stake 25 million VET and have special hardware to support the network and to apply for KYC (and/or be elected) with VeChain before running an Authority Node. Authority Nodes get the highest rates of rewards, but also vote to make decisions on network roadmaps, public relations, technology development etc.
To be an Economic Node, one would have to stake 1 million VET on a VeChain wallet and upgrade to “node” status. They receive staking rewards but do not get to vote on governance issues.
Passive Income via Proof of Stake
As an individual, it might seem that proof of stake is meant for big players or early adopters. While projects like ETH 2.0 require substantial sums to form a node, pooled staking services like Huobi’s ETH 2.0 pool allow individuals to reap the benefits of staking without having to own many tokens.
Profiting from Proof of stake can also be a lot easier than it seems. For example, with NEO, you can start to earn the sub token GAS, which is used for transactions on the NEO network. By depositing NEO into your NEON wallet, you will be generating GAS at a 3.38% rate of return.
Since GAS is produced daily, you will be able to ‘redeem’ your GAS daily. But many exchanges support NEO staking by just holding NEO in their exchange wallets. This enables new users to start earning tokens without the need for complex setups.
Alternatively, you can check out Huobi Pool, where you can lock your tokens and receive rewards as they are distributed.
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