Proof of stake

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Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of proof-of-work (POW) schemes. The first functioning use of PoS for cryptocurrency was Peercoin in 2012, although the scheme, on the surface, still resembled a POW. [1]

Contents

Description

For a blockchain transaction to be recognized, it must be appended to the blockchain. In the proof of stake blockchain the appending entities are named minters or validators (in the proof of work blockchains this task is carried out by the miners); [2] in most protocols, the validators receive a reward for doing so. [3] For the blockchain to remain secure, it must have a mechanism to prevent a malicious user or group from taking over a majority of validation. PoS accomplishes this by requiring that validators have some quantity of blockchain tokens, requiring potential attackers to acquire a large fraction of the tokens on the blockchain to mount an attack. [4]

Proof of work (PoW), another commonly used consensus mechanism, uses a validation of computational prowess to verify transactions, requiring a potential attacker to acquire a large fraction of the computational power of the validator network. [4] This incentivizes consuming huge quantities of energy. PoS is more energy-efficient. [5]

Early PoS implementations were plagued by a number of new attacks that exploited the unique vulnerabilities of the PoS protocols. Eventually two dominant designs emerged: so called Byzantine fault tolerance-based and chain-based approaches. [6] Bashir identifies three more types of PoS: [7]

Attacks

The additional vulnerabilities of PoS schemes are directly related to their advantage: a relatively low amount of calculations required when constructing a blockchain. [8]

Long-range attacks

The low amount of computing power involved allows a class of attacks that replace a non-negligible portion of the main blockchain with a hijacked version. These attacks are called in literature by different names, Long-Range, Alternative History, Alternate History, History Revision, and are unfeasible in the PoW schemes due to the sheer volume of calculations required. [9] The early stages of a blockchain are much more malleable for rewriting, as they likely have much smaller group of stakeholders involved, simplifying the collusion. If the per-block and per-transaction rewards are offered, the malicious group can, for example, redo the entire history and collect these rewards. [10]

The classic "Short-Range" attack (bribery attack) that rewrites just a small tail portion of the chain is also possible. [9]

Nothing at stake

Since validators do not need to spend a considerable amount of computing power (and thus money) on the process, they are prone to the Nothing-at-Stake attack: the participation in a successful validation increases the validator's earnings, so there is a built-in incentive for the validators to accept all chain forks submitted to them, thus increasing the chances of earning the validation fee. The PoS schemes enable low-cost creation of blockchain alternatives starting at any point in history (costless simulation), submitting these forks to eager validators endangers the stability of the system. [8] If this situation persists, it can allow double-spending, where a digital token can be spent more than once. [10] This can be mitigated through penalizing validators who validate conflicting chains [10] ("economic finality" [11] ) or by structuring the rewards so that there is no economic incentive to create conflicts. [3] Byzantine Fault Tolerance based PoS are generally considered robust against this threat (see below). [12]

Bribery attack

Bribery attack, where the attackers financially induce some validators to approve their fork of blockchain, is enhanced in PoS, as rewriting a large portion of history might enable the collusion of once-rich stakeholders that no longer hold significant amounts at stake to claim a necessary majority at some point back in time, and grow the alternative blockchain from there, an operation made possible by the low computing cost of adding blocks in the PoS scheme. [10]

Variants

Chain-based PoS

This is essentially a modification of the PoW scheme, where the competition is based not on applying brute force to solving the identical puzzle in the smallest amount of time, but instead on varying the difficulty of the puzzle depending on the stake of the participant; the puzzle is solved if on a tick of the clock (|| is concatenation):

The smaller amount of calculations required for solving the puzzle for high-value stakeholders helps to avoid excessive hardware. [13]

Nominated PoS (NPoS)

Also known as "committee-based", this scheme involves an election of a committee of validators using a verifiable random function with probabilities of being elected higher with higher stake. Validators then randomly take turns producing blocks. NPoS is utilized by Ouroboros Praos and BABE. [14]

BFT-based PoS

The outline of the BFT PoS "epoch" (adding a block to the chain) is as follows: [15]

  1. A "proposer" with a "proposed block" is randomly selected by adding it to the temporary pool used to select just one consensual block;
  2. The other participants, validators, obtain the pool, validate, and vote for one;
  3. The BFT consensus is used to finalize the most-voted block.

The scheme works as long as no more than a third of validators are dishonest. BFT schemes are used in Tendermint and Casper FFG. [15]

Delegated proof of stake (DPoS)

Proof of stake delegated systems use a two-stage process: first, [16] the stakeholders elect a validation committee, [17] a.k.a. witnesses, by voting proportionally to their stakes, then the witnesses take turns in a round-robin fashion to propose new blocks that are then voted upon by the witnesses, usually in the BFT-like fashion. Since there are fewer validators in the DPoS than in many other PoS schemes, the consensus can be established faster. The scheme is used in many chains, including EOS, Lisk, Tron. [16]

Liquid proof of stake (LPoS)

In the liquid PoS anyone with a stake can declare themselves a validator, but for the small holders is makes sense to delegate their voting rights instead to larger players in exchange for some benefits (like periodic payouts). A market is established where the validators compete on the fees, reputation, and other factors. Token holders are free to switch their support to another validator at any time. LPoS is used in Tezos. [18]

'Stake' definition

The exact definition of "stake" varies from implementation to implementation. For instance, some cryptocurrencies use the concept of "coin age", the product of the number of tokens with the amount of time that a single user has held them, rather than merely the number of tokens, to define a validator's stake. [4] [13]

Implementations

The first functioning implementation of a proof-of-stake cryptocurrency was Peercoin, introduced in 2012. [3] Other cryptocurrencies, such as Blackcoin, Nxt, Cardano, and Algorand followed. [3] However, as of 2017, PoS cryptocurrencies were still not as widely used as proof-of-work cryptocurrencies. [19] [20] [21]

In September 2022, Ethereum, the world second largest cryptocurrency in 2022, switched from proof of work to a proof of stake consensus mechanism system, [22] after several proposals [23] [24] and some delays. [24] [25]

Concerns

Security

Critics have argued that the proof of stake model is less secure compared to the proof of work model. [26]

Centralization

Critics have argued that the proof of stake will likely lead cryptocurrency blockchains being more centralized in comparison to proof of work as the system favors users who have a large amount of cryptocurrency, which in turn could lead to users who have a large amount of cryptocurrency having major influence on the management and direction for a crypto blockchain. [27] [28]

US regulators have argued over the legal status of the proof-of-stake model, with the Securities and Exchange Commission claiming that staking rewards are the equivalent of interest, so coins such as ether and ada are financial securities. [29] However, in 2024, the SEC sidestepped the question by recognising Ethereum market funds on condition that they did not stake their coins. The level of staking of ether at 27% of total supply was low compared with Cardano (66%) and Solana (63%). However, not staking their tokens meant that the funds were losing about 3% of potential returns a year. [30] [31]

Energy consumption

In 2021, a study by the University of London found that in general the energy consumption of the proof-of-work based Bitcoin was about a thousand times higher than that of the highest consuming proof-of-stake system that was studied even under the most favorable conditions and that most proof of stake systems cause less energy consumption in most configurations. [32]

In January 2022, Vice-Chair of the European Securities and Markets Authority Erik Thedéen called on the EU to ban the proof of work model in favor of the proof of stake model due to its lower energy consumption. [33]

On 15 September 2022, Ethereum transitioned its consensus mechanism from proof-of-work to proof-of-stake in an upgrade process known as "the Merge". This has cut Ethereum's energy usage by 99%. [34]

Related Research Articles

Proof of work (PoW) is a form of cryptographic proof in which one party proves to others that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expenditure with minimal effort on their part. The concept was first implemented in Hashcash by Moni Naor and Cynthia Dwork in 1993 as a way to deter denial-of-service attacks and other service abuses such as spam on a network by requiring some work from a service requester, usually meaning processing time by a computer. The term "proof of work" was first coined and formalized in a 1999 paper by Markus Jakobsson and Ari Juels. The concept was adapted to digital tokens by Hal Finney in 2004 through the idea of "reusable proof of work" using the 160-bit secure hash algorithm 1 (SHA-1).

A fundamental problem in distributed computing and multi-agent systems is to achieve overall system reliability in the presence of a number of faulty processes. This often requires coordinating processes to reach consensus, or agree on some data value that is needed during computation. Example applications of consensus include agreeing on what transactions to commit to a database in which order, state machine replication, and atomic broadcasts. Real-world applications often requiring consensus include cloud computing, clock synchronization, PageRank, opinion formation, smart power grids, state estimation, control of UAVs, load balancing, blockchain, and others.

<span class="mw-page-title-main">Cryptocurrency</span> Digital currency not reliant on a central authority

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It has, from a financial point of view, grown to be its own asset class. However, on the contrary to other asset classes like equities or commodities, sectors have not been officially defined as of yet, though abstract versions of them exist.

<span class="mw-page-title-main">Ethereum</span> Open-source blockchain computing platform

Ethereum is a decentralized blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-source software.

A blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Since each block contains information about the previous block, they effectively form a chain, with each additional block linking to the ones before it. Consequently, blockchain transactions are irreversible in that, once they are recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.

A decentralised application is an application that can operate autonomously, typically through the use of smart contracts, that run on a decentralized computing, blockchain or other distributed ledger system. Like traditional applications, DApps provide some function or utility to its users. However, unlike traditional applications, DApps operate without human intervention and are not owned by any one entity, rather DApps distribute tokens that represent ownership. These tokens are distributed according to a programmed algorithm to the users of the system, diluting ownership and control of the DApp. Without any one entity controlling the system, the application is therefore decentralised.

<span class="mw-page-title-main">Ethereum Classic</span> Blockchain computing platform

Ethereum Classic is a blockchain-based distributed computing platform that offers smart contract (scripting) functionality. It is open source and supports a modified version of Nakamoto consensus via transaction-based state transitions executed on a public Ethereum Virtual Machine (EVM).

Proof of space (PoS) is a type of consensus algorithm achieved by demonstrating one's legitimate interest in a service by allocating a non-trivial amount of memory or disk space to solve a challenge presented by the service provider. The concept was formulated in 2013 by Dziembowski et al. and by Ateniese et al.. Proofs of space are very similar to proofs of work (PoW), except that instead of computation, storage is used to earn cryptocurrency. Proof-of-space is different from memory-hard functions in that the bottleneck is not in the number of memory access events, but in the amount of memory required.

<span class="mw-page-title-main">Firo (cryptocurrency)</span> Cryptocurrency

Firo, formerly known as Zcoin, is a cryptocurrency aimed at using cryptography to provide better privacy for its users compared to other cryptocurrencies such as Bitcoin.

<span class="mw-page-title-main">Cardano (blockchain platform)</span> Public blockchain platform

Cardano is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake. It can facilitate peer-to-peer transactions with its internal cryptocurrency, ADA.

<span class="mw-page-title-main">NEO (cryptocurrency)</span> Cryptocurrency

Neo is a blockchain-based cryptocurrency and application platform used to run smart contracts and decentralized applications. The project, originally named Antshares, was founded in 2014 by Da HongFei and Erik Zhang and rebranded as Neo in 2017. In 2017 and 2018, the cryptocurrency maintained some success in the Chinese market despite the recently-enacted prohibition on cryptocurrency in that country.

<span class="mw-page-title-main">IOTA (technology)</span> Open-source distributed ledger and cryptocurrency

IOTA is an open-source distributed ledger and cryptocurrency designed for the Internet of things (IoT). It uses a directed acyclic graph to store transactions on its ledger, motivated by a potentially higher scalability over blockchain based distributed ledgers. IOTA does not use miners to validate transactions, instead, nodes that issue a new transaction on the network must approve two previous transactions. Transactions can therefore be issued without fees, facilitating microtransactions. The network currently achieves consensus through a coordinator node, operated by the IOTA Foundation. As the coordinator is a single point of failure, the network is currently centralized.

Hashgraph is a distributed ledger technology that has been described as an alternative to blockchains.The hashgraph technology is currently patented, is used by the public ledger Hedera, and there is a grant to implement the patent as a result of the Apache 2.0's Grant of Patent License so long as the implementation conforms to the terms of the Apache license. The native cryptocurrency of the Hedera Hashgraph system is HBAR.

<span class="mw-page-title-main">Tron (cryptocurrency)</span> Blockchain computing platform

TRON is a decentralized, blockchain-based operating system with smart contract functionality, proof-of-stake principles as its consensus algorithm and a cryptocurrency native to the system, known as Tronix (TRX). It was established in March 2014 by Justin Sun and since 2017 has been overseen and supervised by the TRON Foundation, a non-profit organization in Singapore, established in the same year. It is open-source software.

<span class="mw-page-title-main">Avalanche (blockchain platform)</span> Open-source blockchain computing platform

Avalanche is a decentralized, open-source proof-of-stake blockchain with smart contract functionality. AVAX is the native cryptocurrency of the platform.

<span class="mw-page-title-main">Ouroboros (protocol)</span> Blockchain protocol

Ouroboros is a family of proof-of-stake consensus protocols used in the Cardano and Polkadot blockchains. It can run both permissionless and permissioned blockchains.

Algorand is a proof-of-stake blockchain and cryptocurrency. Algorand's native cryptocurrency is called ALGO.

<span class="mw-page-title-main">Solana (blockchain platform)</span> Public blockchain platform

Solana is a blockchain platform which uses a proof-of-stake mechanism to provide smart contract functionality. Its native cryptocurrency is SOL.

Proof of identity (PoID) is a consensus protocol for permission-less blockchains, in which each uniquely identified individual receives one equal unit of voting power and associated rewards. The protocol is based on biometric identification, humanity identification parties and additional verification parties.

References

  1. ↑ Zhao, Wenbing; Yang, Shunkun; Luo, Xiong; Zhou, Jiong (26 March 2021). "On PeerCoin Proof of Stake for Blockchain Consensus". ICBCT'21: The 3rd International Conference on Blockchain Technology. ACM. pp. 129–134. doi:10.1145/3460537.3460547.
  2. ↑ Deirmentzoglou, Papakyriakopoulos & Patsakis 2019, p. 28714.
  3. 1 2 3 4 Saleh, Fahad (2021-03-01). "Blockchain without Waste: Proof-of-Stake". The Review of Financial Studies . 34 (3): 1156–1190. doi:10.1093/rfs/hhaa075. ISSN   0893-9454.
  4. 1 2 3 Tasca, Paolo; Tessone, Claudio J. (2019-02-15). "A Taxonomy of Blockchain Technologies: Principles of Identification and Classification". Ledger . 4. arXiv: 1708.04872 . doi: 10.5195/ledger.2019.140 . ISSN   2379-5980. Archived from the original on 2022-04-22. Retrieved 2021-04-26.
  5. ↑ Zhang, Rong; Chan, Wai Kin (Victor) (2020). "Evaluation of Energy Consumption in Block-Chains with Proof of Work and Proof of Stake". Journal of Physics: Conference Series . 1584 (1): 012023. Bibcode:2020JPhCS1584a2023Z. doi: 10.1088/1742-6596/1584/1/012023 . ISSN   1742-6596.
  6. ↑ Deirmentzoglou, Papakyriakopoulos & Patsakis 2019, p. 28715.
  7. ↑ Bashir 2022, p. 334.
  8. 1 2 Deirmentzoglou, Papakyriakopoulos & Patsakis 2019, p. 28716.
  9. 1 2 Deirmentzoglou, Papakyriakopoulos & Patsakis 2019, p. 28713.
  10. 1 2 3 4 Xiao et al. 2020, p. 22.
  11. ↑ Deirmentzoglou, Papakyriakopoulos & Patsakis 2019, p. 28723.
  12. ↑ Deirmentzoglou, Papakyriakopoulos & Patsakis 2019, p. 28717.
  13. 1 2 Bashir 2022, p. 335.
  14. ↑ Bashir 2022, pp. 335–336.
  15. 1 2 Bashir 2022, p. 336.
  16. 1 2 Bashir 2022, p. 337.
  17. ↑ Xiao et al. 2020, p. 21.
  18. ↑ Bashir 2022, p. 337-338.
  19. ↑ Li, Wenting; Andreina, Sébastien; Bohli, Jens-Matthias; Karame, Ghassan (2017). "Securing Proof-of-Stake Blockchain Protocols". In Garcia-Alfaro, Joaquin; Navarro-Arribas, Guillermo; Hartenstein, Hannes; Herrera-Joancomartí, Jordi (eds.). Data Privacy Management, Cryptocurrencies and Blockchain Technology. Lecture Notes in Computer Science. Cham: Springer International Publishing. pp. 297–315. doi:10.1007/978-3-319-67816-0_17. ISBN   978-3-319-67816-0.
  20. ↑ Hissong, Samantha (July 9, 2021). "The Crypto World Is Getting Greener. Is It Too Little Too Late?". Rolling Stone . Archived from the original on January 28, 2022. Retrieved July 22, 2021.
  21. ↑ Nguyen, Cong T.; Hoang, Dinh Thai; Nguyen, Diep N.; Niyato, Dusit; Nguyen, Huynh Tuong; Dutkiewicz, Eryk (2019). "Proof-of-Stake Consensus Mechanisms for Future Blockchain Networks: Fundamentals, Applications and Opportunities". IEEE Access. 7: 85727–85745. Bibcode:2019IEEEA...785727N. doi: 10.1109/ACCESS.2019.2925010 . hdl: 10220/49702 .
  22. ↑ "The Merge". Ethereum. Archived from the original on 2022-09-14. Retrieved 2022-09-15.
  23. ↑ Sparkes, Matthew (2021-03-30). "NFT developers say cryptocurrencies must tackle their carbon emissions". New Scientist . doi:10.1016/S0262-4079(21)00548-0. Archived from the original on 2022-07-14. Retrieved 2021-04-07.
  24. 1 2 Lau, Yvonne (2021-05-27). "Ethereum founder Vitalik Buterin says long-awaited shift to 'proof-of-stake' could solve environmental woes". Fortune . Archived from the original on 2022-06-04. Retrieved 2021-05-29.
  25. ↑ Wickens, Katie (25 October 2021). "'The Merge' to end cryptocurrency mining on gaming GPUs won't come until 2022". PC Gamer. Archived from the original on 4 July 2022. Retrieved 13 December 2021.
  26. ↑ "Crypto's Energy Guzzling Sparks an Alternative That Merely Sips". Bloomberg. 17 November 2021. Archived from the original on 2022-01-29. Retrieved 2022-01-22.
  27. ↑ Chandler, Simon. "Proof of stake vs. proof of work: key differences between these methods of verifying cryptocurrency transactions". Business Insider. Archived from the original on 2022-07-14. Retrieved 2022-01-22.
  28. ↑ Lin, Connie (2022-01-21). "How to clean up crypto mining—and what's at stake if we don't". Fast Company. Archived from the original on 2022-01-26. Retrieved 2022-01-22.
  29. ↑ Michaels, Dave; Ostroff, Caitlin; Kowsmann, Patricia (2023-06-05). "SEC Says Binance Misused Customer Funds, Ran Illegal Crypto Exchange in U.S." Wall Street Journal. ISSN   0099-9660 . Retrieved 2024-07-09.
  30. ↑ "Cryptofinance: into the ether". www.ft.com. Retrieved 2024-07-09.
  31. ↑ "Ethereum ETFs: The SEC's Surprising Shift in Stance". ccdata.io. Retrieved 2024-07-09.
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  33. ↑ Bateman, Tom (2022-01-19). "Ban proof of work crypto mining to save energy, EU regulator says". Euronews. Archived from the original on 2022-04-19. Retrieved 2022-01-23.
  34. ↑ Clark, Aaron (6 December 2022). "Ethereum's Energy Revamp Is No Guarantee of Global Climate Gains". Bloomberg.com. Archived from the original on 7 December 2022. Retrieved 1 January 2023.

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