BaseStaking and miningTechnical Basics
BaseStaking and miningTechnical Basics
- Proof-of-Stake (PoS) is the most popular blockchain consensus algorithm on which many cryptocurrencies and blockchain platforms are built, such as Ethereum, Cardano, Solana, Tezos and Algorand.
- The popularity of PoS is due to the absence of the need to buy expensive mining equipment and the possibility of easy passive income through staking cryptocurrencies.
- The advantage of Proof-of-Stake over another popular Proof-of-Work (PoW) algorithm is the low energy consumption for block generation and blockchain security;
Why and how did it appear proof-of-stake?
When designing the blockchain architecture, which is a decentralized protocol for transfers with a constantly updated database, two key questions arise:
- to whom and on what basis to grant the right to generate new blocks;
- how transactions will be approved to ensure protection against double spending and other abuses.
The solution of these issues has led to the emergence of several consensus mechanisms, that is, sets of rules by which participants in a decentralized network agree on exactly how transactions can be approved and included in new blocks.
The creator of bitcoin Satoshi Nakamoto in October 2008 in the white paper of the first cryptocurrency proposed the Proof-of-Work mechanism (“proof of work”).
According to PoW, operators of nodes of a decentralized network (miners) solve resource-intensive mathematical problems in the free competition mode – searching for a block hash by selection. If successful, the winning miner or pool gets the opportunity to add the found block, and in return receives a reward – new bitcoins.
Already a couple of years after the launch of bitcoin, it became clear that the Proof-of-Work principle leads to a constant increase in mining power, and therefore, electricity costs. In addition, due to the need to use powerful equipment, the availability of mining decreased.
July 11, 2011 at the then popular cryptocurrency forum Bitcointalk was proposed the idea of an alternative consensus mechanism for bitcoin, which is called Proof-of-Stake, or “proof of ownership”.
It was proposed that the right to vote in a decentralized network should be received by all its participants in accordance with what share of the total number of coins they own.
Already in August 2012, this new consensus mechanism received its first practical implementation in the PPCoin cryptocurrency. New coins were distributed through mining, and transactions could be processed by any node that stored the PPC cryptocurrency. The same hybrid consensus scheme was used in other early PoS projects such as Gridcoin and Blackcoin. The first “pure” PoS-cryptocurrency without mining was the Nxt blockchain, launched on November 24, 2013.
The Proof-of-Stake consensus mechanism turned out to be so successful and flexible that in subsequent years it was implemented in hundreds of cryptocurrencies in various versions and modifications.
How Proof-of-Stake works
According to the original concept of Proof-of-Stake, the right to manage the blockchain is granted to all its participants in accordance with the share of coins they own.
For example, in the Nxt cryptocurrency with its “canonical” PoS mechanism, all users who have at least 1002 NXT in the official NXT Client wallet during the last 1440 blocks have a chance to form the next block. At the same time, each wallet is actually a full node (node) and stores its own copy of the blockchain. Such a wallet can be run on a high-performance server, as well as on a laptop, Raspberry Pi microcomputer, and even in a cloud service.
The more coins in the NXT wallet, the more likely it is to get the right to form a new block, and then the user will get all the transaction fees that fall into this block. Ideally, a wallet that owns 1% of the coins will form 1% of all new blocks.
The process of creating blocks in Nxt and other early PoS cryptocurrencies was called “forging” (i.e. “forging”), but this term is rarely used to date.
The process of holding cryptocurrencies in a wallet in order to receive rewards for participating in securing the network is called “staking”. Today, in many PoS-cryptocurrencies, sending coins for staking means blocking them in a special smart contract with the inability to move for a certain time, from several hours to several weeks.
How Coin Delegation Impacted PoS Performance
The use of the Proof-of-Stake mechanism, when almost any cryptocurrency holder can be a block producer, allows achieving a high level of decentralization and blockchain security. However, according to the blockchain trilemma, performance comes at a cost. In the mentioned Nxt cryptocurrency network, the throughput is only 4 transactions per second, which is noticeably lower than many cryptocurrencies using PoW consensus. For example, Dogecoin processes 33 transactions per second.
To find a compromise between decentralization and performance, they proposed the concept of delegation, when coins from many wallets, along with the right to vote, can be transferred to a few computing nodes.
In 2013, Daniel Larimer, an American programmer and crypto entrepreneur, used this concept to create a Delegated Proof-of-Stake (DPoS) mechanism. It was first implemented in the BitShares blockchain platform, and then implemented in various versions in the most famous crypto projects EOS, Cardano, Tezos, etc. Today, the delegation function has become an industry standard and is used in almost all PoS implementations.
In DPoS, cryptocurrency owners themselves may not participate in the operation of the network, but transfer their coins to validators for this — professional participants who manage blockchain nodes. In return, they undertake to award rewards to the owners of the coins, often minus a small commission.
In different blockchains, depending on their architecture, the number of validators involved in the production of blocks differs significantly:
- Polkadot – up to 16;
- BNB Chain and EOS – 21;
- Near – 100;
- Cardano – about 3200;
- Avalanche – about 1200;
- Solana – more than 3400.
- Ethereum – more than 400 thousand.
As a rule, running a validator requires special equipment with constant access to the Internet, as well as a significant amount of native coins of the network. For example, a validator on the Ethereum network must have at least 32 ETH and a Tezos validator must have at least 8,000 XTZ.
Proof-of-Stake and Staking
To compensate for the costs of computing nodes for verifying transactions and generating new blocks, most PoS blockchains provide for a reward that is paid in native coins of this network. As a rule, its size for each block is fixed, but may vary depending on the current network parameters.
For example, in the Tron blockchain platform, a super representative (as the validator is called in this case), who generated the next block and processed transactions, receives 32 TRX. He shares part of this amount with users who staked their TRX and thus voted for him.
The profitability of staking for validators and coin holders is determined by two factors:
- emission rate, which is determined by a fixed value of coins issued for each new block;
- the share of coins in circulation that are locked in staking (Staking Ratio);
For example, if 1 million coins are issued through staking per year with a total supply of 100 million coins, then the profitability of staking with 50% locked coins will be 2% per annum. If 25% of the supply is blocked in staking, then the yield doubles, up to 4% per annum.
What types of Proof-of-Stake exist
Based on the principles of PoS and delegation, many consensus mechanisms have been developed, which differ in a number of nuances, for example, the distribution of roles between participants in a decentralized network.
Here are some of them:
- Leased Proof-of-Stake (LPoS, “lease proof of share”) — used in the Waves blockchain, Where users rent their coins to the validator for a fee;
- Nominated Proof-of-Stake (NPoS, “nominated proof of stake”) — used in the Polkadot blockchain platform and involves the presence of so-called nominators who pay deposits for validators and are responsible for their integrity;
- Pure proof-of-stake (PPoS, “pure proof of stake”) – used in the Algorand network, where the next block validators are secretly and randomly selected among all wallets with a balance of more than 1 ALGO;
- Effective Proof-of-Stake (EPoS, “efficient proof of stake”) — used in the Harmony blockchain platform. It has a special reward distribution mechanism that encourages the launch of many small validators instead of a small number of large ones, which stimulates decentralization;
- Proof-of-Authority (PoA) — a hybrid algorithm that combines proof of stake and validator reputation, each of which must be approved by the developers. In PoA, the validator must undergo an identity verification procedure similar to KYC. This algorithm uses BNB Chain.
Is it possible to switch to Proof-of-Stake for Bitcoin and other cryptocurrencies?
The high energy consumption of mining cryptocurrencies running on the PoW algorithm has been the subject of criticism for many years. According to a recent study by the Cambridge Center for Alternative Finance, bitcoin mining is responsible for 0.1% of all anthropogenic carbon dioxide emissions.
It was this factor that became one of the main arguments in attempts to ban mining in different countries. So, by the end of 2021, cryptocurrency mining was banned in China. In March 2022, the European Parliament put to a vote the issue of banning cryptocurrencies. Although the bill was not supported, it marked a trend towards squeezing PoW out of the legal field.
After the successful transition of the Ethereum network to the Proof-of-Stake consensus on September 15, 2022, the power consumption of the network decreased by almost 2000 times or 99.95%. In this regard, the discussion of the transition of popular PoW cryptocurrencies to PoS has begun with renewed vigor.
Back in December 2021, the developers of the Dogecoin meme-cryptocurrency announced its imminent transition on the Proof-of-Stake algorithm. Vitalik Buterin, co-founder of Ethereum, decided to help them in this process.
The Electric Coin Company, the developer of the anonymous Zcash cryptocurrency, is also discussing with the community the prospects for moving to PoS. According to the founder of the company, Zuko Wilcox, this will not only increase the security and energy efficiency of the blockchain, but also help attract ZEC owners to manage the protocol.
The greatest doubt is the possibility of switching to PoS in the case of bitcoin.
Firstly, the first cryptocurrency does not have a single developer. Several independent development teams are discussing all the proposed innovations, so that even the implementation of even the smallest of them causes fierce debate and takes years.
Secondly, the transition to PoS will not be supported by mining pools, which this step threatens with loss of income. It is noteworthy that back in 2020, a group of developers launched a fork BitcoinPoSwhich the crypto community simply ignored.
In turn, PoW supporters point to a higher level of security for this algorithm: with the current, extremely high level of decentralization of the bitcoin network, it is practically invulnerable to external attacks.
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