In my previous article, I discussed how the cryptocurrency Bitcoin, use a consensus algorithm known as Proof of Work to secure their network & process transactions. The concept of Proof of Work uses enormous amounts of energy, but why is that? What are some alternative solutions?

Proof of Stake Overview

The Proof of Stake method was created as a competitor to Proof of Work. It helps solve some of the issues opened up by PoW. The goal of all consensus algorithms is the same; to decentralize power, to limit censorship of the inclusion of transactions into blocks, and to make sure that everyone agrees on the correct order of transactions.

Once you can agree on the order of events, and prohibit censorship on the network, it is just a matter of applying the algorithm to the validating nodes to arrive at the consensus state. The idea of Byzantine Fault Tolerance is essentially everyone being certain that everyone is certain that everyone is in agreement. In the case that you had a disagreement or conflicting ideas that would be described as a Byzantine Failure. Think of this as a situation where half the Generals attack and half do not attack, the battle would be lost.

What does it mean to be Byzantine Fault Tolerant? In a state of Byzantine Failure, cryptographic evidence can prove who the “at fault” Generals (nodes) are. When you have a system that can produce this cryptographic evidence of failure, you can use that to penalize whoever is at fault. Punishments in the blockchain world include a variety of things. Losing your stake in the network, being excluded from the network, etc.

Issues with PoW Mining new coins consume a lot of computing power because of the proof of work algorithm. The idea first introduced in 1993 as a method to combat spam emails. It was formally called Proof of Work in 1997, the technique went largely unused until Satoshi Nakamoto created Bitcoin in 2009. After studying Proof of Work he came to the conclusion that the technique could be used to achieve consensus among many nodes on a network, using it is a way to secure the Bitcoin blockchain. The PoW algorithm works by having all nodes work to solve a cryptographic puzzle, the “puzzle” is solved by miners, the first miner to find the solution to the puzzle gets the miner reward. The computing power needed has become so intense, that people are building enormous Bitcoin mining farms, which are 100’s of computers working together to solve these ‘puzzles’. At the time of writing this article, it is estimated that Bitcoin miners alone use 54 TWh (TeraWatt Hours) of electricity per year. For a comparison, this would be enough to power 4.5 million US homes. To take it further, it also equates to the same amount of power used by the entire country of New Zealand.

51% Attack

Proof of work gives more rewards to people with more and better equipment, miners that produce the highest hash rate (which is done by supplying large amounts of computing power) has the highest chance of finding the next block and earning the block reward. To increase their chances even further, miners will merge resources together, creating what is known as a ‘mining pool’. Mining pools will combine the hashing power of all nodes in the pool, and the rewards will be distributed evenly based on the hash power given to the pool. The majority of Bitcoin mining is done by mining pools, with the Top 3 controlling about 52% of the mining. To sum this up, PoW uses an extraordinary amount of electricity to solve the algorithm. Because of the hash power needed, solo mining is just not feasible. This has led to mining farms which essentially make Bitcoin more centralized (since 3 mining pools control more than 51%). Because of these weaknesses associated with Proof of Work, cryptographers needed a new consensus algorithm.

History of Proof of Stake

In 2011, a Bitcoin talk forum user named Quantum Mechanic proposed a new technique that he called Proof of Stake. The basic idea is that letting everyone compete against each other in the mining process is very wasteful of resources. Instead, Proof of Stake uses an election process, where one node is selected to ‘validate’ the next block. Proof of Stake also does away with the terminology of miners, instead, they have the concept of Validators. A Validator does not mine new blocks (remember mining is costly), a validator will Mint or Forge a new block. Anyone can become a validator. You must deposit a certain amount of coin into the network as ‘Stake’ (similar to how a security deposit works). The size of the stake determines the chances of a validator to be chosen to Mint the next block. The correlation for this process is linear. If Validator A deposits $200 and Validator B deposits $2,000, then Validator B has 10X greater chance of being selected of Validator A. For fans of Robin Hood (the Movie not the Crypto Exchange), this might not seem like a completely fair concept. As it would seem that it is a system to favor the rich and cripple the poor. In reality, it is actually a more fair process than Proof of Work, with PoW rich people can use the power of economies at scale. The prices they pay for extra mining equipment and electricity does not go up in a linear fashion, it actually works the other, the more they buy of each the better pricing they will get on the whole package. How Does PoS Work?