Black Box of Blockchain

In this article, we will take a closer look at Proof of Stake models from consensus algorithms. The past, present and future of PoS are extremely important. So why? Because many of the concepts we discussed, such as NFT, Metaverse, and Web3, rely on blockchain technology. The value of this technology comes from consensus algorithms. Among the consensus algorithms, the models in which the aforementioned new concepts can be realized seem to take place on PoS, not on PoW, due to the scalability problem. That's why it's important to understand PoS.

Let's first take a brief look at why we need consensus algorithms. Next, let's focus on the PoS models behind today's blockchain technologies.

Central and Decentralized Systems

In any centralized system, a central administrator has the power to add and update records in the database, just as a state that holds census information is a database that holds important information about its citizens. Here, the feeling of trust is exercised by a central authority that is solely responsible for keeping the actual records.

In decentralized systems, on the contrary, there are mechanisms that operate as self-regulating systems and operate without a single authority. It may include the contributions of a large number of participants working on the verification of transactions occurring on the blockchain and block generation. But of course this is not as easy in practice as it is in theory. Because in the ever-changing status of the blockchain, there can be a lot of malicious attacks. Therefore, everyone needs an efficient, real-time, functional, reliable and secure mechanism to ensure that all transactions in these ledgers are genuine and that all participants agree on a consensus. This is where consensus algorithms come into play.

As you know, our full acquaintance with the concept of blockchain goes back to the Bitcoin whitepaper. Although the phrase "blockhain" is not directly mentioned in this document, it takes its place in the history of blockchain technology with the phrase "chain of blocks". As is known, the consensus algorithm mentioned in this document was the Proof of Work algorithm, known as proof of labor.

Proof of Work

Proof of Work is the consensus mechanism used by Bitcoin and subsequently applied to the likes of Ethereum, Litecoin, and Dogecoin. PoW involves doing thousands of calculations per second to find the solution to a hard-to-solve but easy-to-verify math problem. The Proof of Work system encourages miners by rewarding them with coins for each new block found.

Although it has been a very fair and secure consensus mechanism, alternative approaches to PoW have been studied since it could not adequately respond to some needs that have emerged over the years. The most important of these needs are low energy use and increasing the number of transactions per second. Since Bitcoin's high energy use is also the parameter that ensures its security, a direct solution has not been implemented in this regard. Similarly, no permanent solution has been found to increase the number of transactions per second. Let's note that these mentioned issues do not indicate that Bitcoin is a worthless technology than others. Just as today's grocery shopping with gold will not make it worthless, Bitcoin has taken its place in the history of technology and finance as a store of value. However, just as paper money is needed other than gold, some blockchain technologies other than Bitcoin are needed. A significant part of these technologies use PoS models known as proof of stake instead of proof of labor.

Proof of Stake

Proof of Stake (PoS) is a consensus algorithm developed as a lower-cost, low-energy alternative to the PoW algorithm. The aforementioned advantages of Proof of Stake include allocating the responsibility of maintaining the blockchain ledger to a participating node in proportion to the number of digital asset tokens a person owns. The model states that if a person is holding that digital asset, they will not want to harm the system by fraudulently, but will strive to increase the security of the system. Proof of Stake is divided into some sub-headings in itself. This is the part we will focus on in this article. In fact, it is these consensus algorithms that are competing in the background of cryptocurrencies and visible blockchain technologies.

Proof of Stake (DPoS)

The first disadvantage of the Proof of Stake model is that many people want to stake their assets without downloading the full node of the network. The asset owner says: “Yes, I want to increase the security of the network, but I can't get the whole node to download and run it all the time, is there an alternative?” This is where some models, such as DPoS, come into play. DPoS generally works through an electoral system where a fixed number of validators are authorized to secure the network. As an asset owner, you can vote on who will approve transactions on the network, with voting power determined by the size of your stake. Verifiers with the most votes become delegates, confirm transactions and collect prizes for it. That is, you become a partner with your own assets to a full node run by a person. It is used in protocols such as DPoS, Lisk, Tron, Steem, Bitshares, EOS. Although this method consumes less energy, it is criticized in one way because of the high probability of centralization.

Liquid Proof of Stake (LPoS)

Authorization in LPoS is optional. Token holders can transfer their verification rights to other asset holders without oversight, meaning that the assets will remain in the wallets of the issuers. Additionally, only the verifier is penalized in case of security failure. LPoS also offers voting rights, except that as an asset owner, you can vote directly on protocol changes, not just who secures the network as in DPoS. LPoS was first introduced by the Tezos blockchain. LPoS in Tezos has proven to be successful and a decentralized model has also been achieved. At the time of writing, the Tezos network had a 75% stake and 107k agents, according to TZStats data.

Conclusion

Considering the technological, financial and human resources power of blockchain technologies today, we can think that many Proof of Stake algorithms will emerge in the future. Although both PoW and PoS models have their own advantages, it is not difficult to predict that PoS will be in the field in the intense transfers that will be created by the idea of ​​transforming the Internet called Web3 to a new format. Of course, it will be extremely valuable for the Turkish IT ecosystem to work on its own PoS models, to create PoS validator pools for existing models, and to provide digital literacy trainings to users who will transfer their assets to representatives.