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Proof of stake (PoS) is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. In PoS-based cryptocurrencies the creator of the next block is chosen via various combinations of random selection and wealth or age (i.e., the stake). In contrast, the algorithm of proof-of-work-based cryptocurrencies such as bitcoin uses mining; that is, the solving of computationally intensive puzzles to validate transactions and create new blocks.
Proof of stake must have a way of defining the next valid block in any blockchain. Selection by account balance would result in (undesirable) centralization, as the single richest member would have a permanent advantage. Instead, several different methods of selection have been devised.
Nxt and BlackCoin use randomization to predict the following generator by using a formula that looks for the lowest hash value in combination with the size of the stake. Since the stakes are public, each node can predict—with reasonable accuracy—which account will next win the right to forge a block.
Peercoin's proof-of-stake system combines randomization with the concept of "coin age", a number derived from the product of the number of coins multiplied by the number of days the coins have been held.
Coins that have been unspent for at least 30 days begin competing for the next block. Older and larger sets of coins have a greater probability of signing the next block. However, once a stake of coins has been used to sign a block, it must start over with zero "coin age" and thus wait at least 30 more days before signing another block. Also, the probability of finding the next block reaches a maximum after 90 days in order to prevent very old or very large collections of stakes from dominating the blockchain.
This process secures the network and gradually produces new coins over time without consuming significant computational power. Peercoin's developer claims that the lack of need for centralized mining pools—and the fact that purchasing more than half of the coins in circulation is likely more costly than acquiring 51 percent of available proof-of-work hashing power—makes a malicious attack on the network more difficult.
Various projects such as EOS, Bitcoin-sCrypt, Steem, Lisk, Ark and Bitshares are using delegated proof-of-stake, or DPoS. The system uses a limited number of nodes to propose and validate blocks to the blockchain. This is meant to keep transaction processing fast, rather than using several hundred or several thousand nodes. EOS uses a limited number of block validators, 21, whose reputation may or may not drop, allowing back-up validators to replace former nodes.
Orbs uses a similar process, dubbed randomized proof-of-stake (or RPoS) but selects an entire committee rather than a single block leader. Each node is selected randomly using a verifiable random beacon to propose the current block of transactions. Then, the block is verified through that committee containing a pre-set number of nodes from within the total network of nodes available.
Proof-of-stake currencies can be more energy efficient than currencies based on proof-of-work algorithms.
Incentives also differ between the two systems of block generation. Under proof of work, miners may potentially own none of the currency they are mining and thus seek only to maximize their own profits. It is unclear whether this disparity lowers or raises security risks. Under proof of stake, however, those "guarding" the coins always own the coins, although several cryptocurrencies do allow or enforce the lending of staking power to other nodes.
Some authors argue that proof of stake is not an ideal option for a distributed consensus protocol. One issue that can arise is the "nothing-at-stake" problem, wherein block generators have nothing to lose by voting for multiple blockchain histories, thereby preventing consensus from being achieved. Because unlike in proof-of-work systems, there is little cost to working on several chains.
Many have attempted to solve these problems:
Statistical simulations have shown that simultaneous forging on several chains is possible, even profitable. But proof of stake advocates believe that most described attack scenarios are impossible or so unpredictable as to be only theoretical.
one thing has become clear: proof of stake is non-trivial
Ethash is the planned PoW algorithm for Ethereum 1.0