In 2012, high energy consumption of Bitcoin mining led to the invention of Proof of Stake (PoS) by Sunny King and Scott Nadal. An average of $150,000 a day was required to maintain the Bitcoin network at that time. An alternative method called staking was introduced by Sunny and Scott where a deterministic algorithm would choose nodes based on an individual’s number of coins. This could avoid relying on the energy-dependent work of miners to add blocks. More chances were allotted to stakers for being selected to add a block to the chain and gain reward. Their intentions were to avoid ever increasing energy costs and hashrate difficulty of mining. But there were several issues associated with the algorithm.
The Major Four Issues with Proof of Stake
- Distribution: Initial distribution of coins raised questions as rewards were to be given to stakers.
- Monopolization: A majority of all future coins could be reaped by those with a significant amount of coins.
- 51% attack: PoS have to be wary of a staker who has a 51% stake weight, just like how Proof of Work have to be wary of a miner.
- Nothing at Stake (NoS): When a set of conditions is met by a node that includes stake weight, PoS adds a block. When two nodes meet the conditions at the same time,the coins fork. The other nodes sign one of the two transactions to resolve the fork. When 99% of all nodes sign both chains because there is no cost to verify these transactions, NoS arises. By paying with coins on one chain and verifying the other, it lets 1% staker to potentially double spend.
Let’s see how each coin attempts to solve these issues:
Peercoin (PPC) was introduced by Sunny King in 2013 as the first cryptocurrency to implement Proof of Stake. The issues of PoS were addressed as follows:
1) Distribution: A Proof of Work-based distribution is used by Peercoin which has been decreasing from the initial distribution phase.
2) Monopolization: The implementation of coin age prevented coin-rich stakers from dominating the rewards.
3) 51% attacks: It is incredibly expensive to perform an attack even though being a hybrid since the PPC’s chain is completely secured by PoS. Attacks are highly unlikely to occur as it would devalue the attacker’s coins causing them a heavy loss.
4) Nothing at Stake: This is not expected to occur but still optional checkpoints are setup in case a successful attack happens. Now checkpoints are in the process of being phased out as PPC has developed.
Blackcoin, released in February 2014,was created by Pavel Vasin (a.k.a. Rat4) which followed a simpler proof of stake protocol and had a fairer initial distribution phase. He set out to remove coin age and PoW to create BLK. He believed that the coin age increased the chances for 51% stake attack as less than 51% of staking older coins could cause a fork. In coin age, rewards were not provided for consistent staking but to remain offline to improve chances of getting a stake that generated less secure network. The issues of PoS were addressed as follows:
1) Distribution: BLK followed a simpler proof of stake protocol with no pre-mining.
2) Monopolization: Fair distribution period was established by BLK.
3) 51% attacks: Very expensive to buy enough coins for the attack and the coin would lose significant value when attack is performed.
4) Nothing at Stake: BLK included checkpoints to protect against hard forks even though had no threat to occur. In PoS 3, these checkpoints will be removed.
Ethereum (ETH) is the latest iteration of PoS. Primarily, a desire to move towards a more eco-friendly and decentralized system led to the development of ETH. A Byzantine Fault Tolerance (BFT)-style PoS will be implemented by Ethereum’s PoS system. A multi-round process generates a consensus where every validator votes for a chain. Validators are randomly assigned block rewards. Currently, the makers are at a confused state in implementing PoS. The issues of PoS were addressed as follows:
1) Distribution: In 2014, ETH distributed approximately 70% of entire ether in circulation via PoW in its ICO.
2) Monopolization: In order to stake, ETH plans to lock coins in a smart contract.
3) 51% attacks: It is incredibly expensive to participate in a 51% attack. Michael Gubik proposes utilizing social/business/exchange forums to select one of the forked chains for an attack to happen.
4) Nothing at Stake: Signing orphaned blockchains can cause the validators to get disincentivized.
According to the history of cryptocurrency, a number of iterations of PoS were introduced such as Hybrid PoS-PoW, pure PoS, Delegated PoS, BFT-style PoS. The latest iteration running currently to address the issues of PoS is the BFT-style PoS. These establishments were made to develop a more eco-friendly and decentralized system in the world of cryptocurrency surrounding the protocol initially proposed by Sunny and Mark.
There have been different versions of PoS over the history of cryptocurrency from the Hybrid PoS-PoW to pure PoS to Delegated PoS. The BFT-style PoS is the latest effort to address the four major problems surrounding the protocol initially proposed by Sunny and Mark. Each coin reflects a different approach and each has its own strengths and weaknesses.