Proof of Stake Summary [Cryptocurrency consensus mechanisms]

In a Proof of Stake system, participants stake a certain amount of cryptocurrency in order to have a chance at being chosen to solve a block.

PoS rules vary among cryptocurrencies.

Most staking systems work like a lottery, where the amount of staked coins determines the odds of being chosen to solve a block. The more coins you have staked, the higher the odds of being chosen and thus a higher potential reward. The amount of coins staked is, therefore, akin to spending on mining equipment for PoW systems. While in PoS the more expensive equipment usually produces more blocks, in PoS the high cost comes from having to accumulate and lock a high amount of coins in order to be a candidate in the staking system.

PoS is considered a much more eco-friendly mechanism than PoW since it does not involve high energy consumption.

Examples of Proof of Stake coins include Tezos STZ, Decred DCR, Cardano ADA, Dash, NEO, PIVX, OkCash, NavCoin, Stratis and others.

Sybil Attacks Against PoS

PoS systems can be vulnerable to the so called sybil attacks.

In this kind of attack a single party artificially generates a high number of network participants which appear to vote for the attacker, thus defrauding the lottery system which chooses the next block leader.

The usual defense against sybil attacks is to charge a minimum price for users to join the staking system.

For example, Tezos currently requires a minimum of 8000 STZ (U$ 24,000 at the time of this writing) in order to allow a user to be a candidate for block solving. The high cost involved in becoming a Tezos miner thus makes it intractable to create a high number of nodes required for a sybil attack.

PoS and Staking Rewards

PoS coins provide an incentive for investors to hold the coin for the long term. This incentive comes in the form of periodic staking rewards.

In order to generate passive income from staking, investors must lock their coins in the staking system for a certain period.

Decred, for example, requires a minimum of 24 and a maximum of 142 days before coins are chosen to mine a block. Decred stakeholders are thus likely to hold the coin for a minimum of 24 days. This is a very attractive feature for investors because it tends to make the coin more scarce and therefore more valuable on exchanges.

Staking rewards are usually paid in cycles. These can have many different names.

Cardano ADA, for example, calls them epochs. Tezos calls them cycles and Decred works block by block.

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