What is proof of stake?
The mechanics and incentives of proof of stake algorithms work differently. When creating a new block, the proof of stake algorithm chooses who is the block validator by checking how many coins a person is staking. The bigger the stake, the higher the probability of being chosen as a block validator. In proof of stake, we call the nodes doing the work block validators instead of miners, and we say that block validators mint new blocks instead of mining new blocks.
When a new transaction is issued, it is placed into a block with other transactions, and the block is limited to a certain size in MB. The validating node verifies the transactions’ validity in a block and broadcasts the block to the other nodes in the blockchain. After validating the block and sharing it with the other nodes, the validating node will receive a reward if the other nodes agree with the content of the block.
Ethereum is moving to Ethereum 2.0, integrating Casper, a proof of stake consensus mechanism that will switch Ethereum from proof of work to proof of stake. The new Ethereum proof of stake protocol demands block validators to make a security deposit for the validator to be able to participate in the consensus. If they create a fraudulent block, their deposit will be forfeited, and the block validator loses the ability to participate.
Pros and cons of proof of stake
- It doesn’t require much electricity when comparing to proof of work
- It’s considered safe and resilient to 51% attacks when comparing to small proof of work cryptocurrencies
- Nothing at stake problem
- Fake stake attack and DDoS attacks — somebody can lie on how much stake do they own in order to connect to another node and flood him with connections (DoS attack)
In proof of stake, block validators increase their chance of being selected to validate a block based on how much do they have at stake. Bigger the stake, the higher the odds of being selected to validate the block and win then reward. In other words, the more lottery tickets you buy, the higher the probability of winning the prize. Following the example of our chart, let’s say Eve bought ten lottery tickets, Frank bought 20 lottery tickets, and Carol bought 30 lottery tickets, increasing this way her chance.
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To perform a 51% attack, one’s would need to buy at least 50% of the cryptocurrency available, which would be very expensive. Most of the proof of stake mechanisms have protections against this, but performing a 51% attack on a proof of stake cryptocurrency wouldn’t be very smart anyway.
Although it would be very expensive for someone to acquire 51% of all the coins of a cryptocurrency, a person could indeed do it and try an attack. However, it wouldn’t be in his best interest to attack the network on which he holds a majority. This would harm the network and make the cryptocurrency value to fall, which means that the attacker’s holdings would also fall. Consequently, someone who holds a majority in the network would be incentivized to maintain the network secure.