Blockchain is a decentralised framework of hundreds of thousands of users. Due to its decentralised existence, the blockchain lacks a central authority to search and update the ledger of new transactions. As a result, network participants must agree on which transactions should be added to the blockchain on an equal footing. A mechanism known as the consensus algorithm was developed to solve this problem.
The consensus algorithm is a collection of mathematical rules and functions that enable all participants in the blockchain network to reach an agreement, ensuring the network's success. Consensus algorithms are used to ensure the stability of a network with a limited number of untrustworthy nodes. There are numerous blockchain consensus algorithms currently in use, with Proof of Stake (PoS) being one of the most well-known and successful.
Proof of Stake (PoS)
The Proof of Stake consensus algorithm was first proposed as a replacement for the Proof of Work (PoW) algorithm in 2011. The PoS algorithm was first implemented in the cryptocurrency PPCoin, which is now known as PeerCoin, in 2012.
PoS: How it works
Proof of Stake is a consensus algorithm in which the probability of adding a new block to the blockchain and receiving a reward is proportional to the number of coins held and set aside as a stake by the consumer (validator). The stake's age and other factors that affirm the user's desire to grow the network can be taken into account. Block validators in blockchains using the PoS algorithm are commonly referred to as forgers rather than miners.
PoW versus PoS
The Proof of Stake algorithm was developed to resolve the issues that the Proof of Work algorithm had. In PoW blockchains, transactions are tested by miners who solve complex mathematical puzzles using the computational power of special mining hardware. The miner who solves the puzzle first adds a new block to the blockchain and receives a cryptocurrency reward for doing so. Despite the fact that the process of solving these puzzles uses a lot of energy, the calculations serve no function other than to determine who can add the next block.
To shape new blocks in PoS-based blockchains, no large amounts of electricity are needed. The network participants' costs for managing the network are greatly reduced thanks to the algorithm's energy efficiency. As a result, there is no need to generate new coins as a reward for adding a new block, and the network can instead pay only transaction fees.
Apart from that, mining is still plagued by the issue of centralised control. Over 70% of Bitcoin's hashrate is currently concentrated in one country, China. Given the Chinese government's anti-cryptocurrency stance, this situation poses a threat to the Bitcoin network. The method of creating new blocks for a cryptocurrency based on the Proof of Stake algorithm is not related to either the owners of vast quantities of expensive equipment or to regions with cheap electricity.
Masternode vs PoS
Masternodes, which are servers on a cryptocurrency network that perform functions not accessible to normal nodes, are used by some cryptocurrencies. Anonymizing transactions, confirming them, and engaging in network management are examples of these features. In general, a certain amount of the network's cryptocurrency is needed as collateral to build a masternode. In this case, the network pays the masternode's owner a payout on a regular basis.
It's not entirely accurate to compare masternodes and the Proof of Stake algorithm. Masternodes are a form of node that is used in both PoS and PoW cryptocurrencies, as well as hybrid variants. However, there is still room for comparison in terms of making money with cryptocurrencies. As a result, while much more costly than staking, installing a masternode still provides a higher, more secure income.
Concerns about PoS
Despite the obvious benefits of Proof of Stake, it raises a number of concerns:
Proof of Stake contributes to the motivation to hoard money, eventually contributing to network centralization.
Furthermore, if a small group of people with sufficient funds join together, they may enforce their own rules on how the cryptocurrency should operate, which most minor users without forging power would find objectionable.
The initial distribution of coins is another issue with the PoS algorithm. You must first produce coins in some way before you can stake them. To get around this problem, PoS-based cryptocurrencies must employ a variety of methods for the initial distribution of coins, such as the Proof of Work algorithm.
