Proof of stake consensus – why appealing? Part 2

By Lumai Mubanga

In part 1, we focused on one similarity and two types of PoS algorithm. Many readers are aware that the PoW algorithm is behind the most popular cryptocurrency, Bitcoins. But flipping the coin reveals a number of drawbacks associated with this algorithm. This article will briefly review this and then discuss why proof of stake was introduced.

Earlier, we discussed the massive amount of energy consumption required for proof of work, the potential for 51% attacks, as well as the shift from decentralized individual miners, to more centralised mining pools.

To solve some of these issues, proof of stake was introduced. As mentioned earlier, proof of stake is a consensus mechanism were voting power is directly proportional to economic stake locked up in the network, instead of computational power and resources.

Each participant stakes a certain amount of native currency, I.e. Tezos or EOS, and each node is given a probability of being chosen as the next validator, weighed by how much was at stake. Once a validator is chosen, he can propose a valid block band receive a reward. With this scheme, how much power a participant has in the network is limited by the amount they are willing to stake. Rather than relying on rewards for security, proof of stake relies on penalties. If a participant places stake on a dishonest block, they are penalized and lose whatever amount they put at stake.

Acting maliciously in this case is penalized much more heavily than the gain from acting honestly. This is one example of defender’s advantage. Nodes are now more disincentivized to act maliciously due to the explicit consequences of doing so. This security comes from locking up capital for long periods of time. On the other hand, proof of work has no such defenders advantage: the cost of attacking and the cost of defending are 1:1, meaning, the amount of resources YOU spend on acting honestly compared to acting dishonestly are equal. There is no explicit disincentive against acting maliciously in proof of work: it just simply allows it. Another advantage proof of stake has over proof of work is the drawback in attempting a 51% attack.

In proof of work, a dishonest actor needs 51% of the network’s hash power, and once achieved, can censor transactions, rewrite transaction history, and perform double spend attacks. Nodes are not explicitly discouraged from attempting a 51% attack, and if unsuccessful, only lose the resources used to attempt the attack.

This cannot be said of proof of stake which requires 51% of the networks’ coins. This is incredibly expensive, and then the attacker must stake all of their wealth in order to attempt executing the attack. Also, since this miner owns 51% of the cryptocurrency, it is not in their best interest to attack a network that they hold a majority share in if the value of the currency were to drop due the attack.

As seen, there are major drawbacks in attempting this, another example of proof of stake’s disincentive focused system. Although proof of stake fixes many issues with proof of work, it is not without its own drawbacks.

This will be discussed in the next article.