What is Proof-of-Stake (PoS) and what are its benefits and drawbacks?

Proof of what?

A distributed ledger system employs a consensus algorithm to ensure its safety, speed, and general functionality. In brief, a proof of stake (PoS) algorithm allows users to “stake” their holdings as a means to verify the consensus. While investors cannot trade these staked assets, they earn proportionate returns for their investment.

Consequently, the larger someone’s staked holdings, the larger their return will be. In essence, this enables investors who already retain substantial holdings in a particular cryptocurrency to gain more shares (which brings us back to the word staking). Critics rightly observe that such staking invariably leads to greater centralization and “the rich getting richer”.

Do cryptocurrencies value decentralization?

One reason for creating cryptocurrencies was to take power away from any central authority. Since ‘decentralization’ is relative and can be broadly construed, it’s essential to clarify what it entails. As currently conceived, a truly decentralized cryptocurrency is distributed evenly to outside investors (that is, without any investor holding a significant share). Decentralization is highly valued by some investors, particularly those who seek more financial freedom and control.

Unfortunately, several cryptocurrencies tend to move in the opposite direction, allowing the top 100 wallets to hold 50% or more of a coin’s total supply. Consider Ethereum (ETH), a Proof-of-Work (PoW) currency planning to swap to PoS, where the top 50 wallets already own ~40% of the coin’s total supply (including those in exchange wallets). Centralization such as this compromises crypto popularity and suggests similarities to fiat. One need only consider how cynical crypto-fans have become towards Ripple and other highly centralized coins within the past year.

Why use Proof of Stake algorithm at all?

Despite these flaws, the PoS has shown itself to be a popular and sustainable algorithm. Not incidentally, PoS fully overcomes the PoW issues associated with excess electricity consumption. For Bitcoin, the computational energy required to achieve consensus is equal to the ‘work’ required to verify and validate new blocks on the blockchain.

In contrast, PoS achieves consensus through voting, determining voting weight by how much currency an investor stakes. So to gain 50% of the voting power, an investor would need to hold 50% of the staked supply (typically an enormous financial investment). Moreover, any staked investor harming the network would devalue their own investment. However, as staking a coin merely requires having sufficient finances, it’s far easier to hijack a PoS currency than a PoW currency.

Alternatives for reaching blockchain consensus

Several alternative consensus algorithms exist as well, most notably EOS’ delegated proof of stake (DPoS) or IOTA/Nano’s directed acyclic graphs (DAGs), While both have their drawbacks, they appear to be better alternatives than PoS or PoW. In addition, XTRABYTES is seeking to differentiate itself by presenting its own consensus algorithm, Proof of Signature (PoSign). PoSign is immensely fast, fully secure, and requires little to no energy to sustain its network.

The future of consensus

In brief, PoSign relies upon 3584 STATIC nodes (a form of masternode) to support its network. As such, the network is fully decentralized and secure. STATIC nodes ensure the latter by requiring new transactions to be validated by their signatures. As with masternodes, these STATIC nodes generate passive income from dApps and network transaction fees. Once STATIC nodes begin operating, XTRABYTES investors will be able to observe PoSign’s relative superiority for themselves.

While many algorithms support blockchain consensus, PoW remains a substantial force for achieving decentralization and security. However, this feat comes at a price, as bitcoin continues to consume excessive amounts of electricity. Being far less energy-intensive, PoS is an attractive alternative in this regard. However, it tends to increase wealth for the wealthy, as it provides greater rewards for those investors willing to “stake” greater amounts of said currency. Cryptocurrencies would do well to explore the many worthwhile alternatives, as both PoW and PoS appear to be unsustainable options in the long run.