Proof of Stake (PoS) is a consensus algorithm for public blockchains designed to be less expensive than Proof of Work (PoW) whilst still being able to achieve high degrees of security and reliability. It was first developed by Sunny King and Scott Nadal in 2012 as a method to address the increasing energy cost of PoW networks.
Whilst there are a number of implementations of PoS the general principle is that actors participation in a network is dependent on their economic stake in that network. The more cryptotokens the actor is willing to stake, the more control over the network they will have, but at the same time, the greater their potential loss should they try to corrupt the system. It gives cryptoeconomist greater control over the asymmetric risk and reward structures for various actions by allowing them to explicitly design the penalties for adversarial behaviour.
In PoS networks, a miner who creates a new block has to trade in old coins to get new ones. However, the protocol prefers miners who have held a lot of coins for a long time so a miner that has just created a block has a lower chance of creating the following block.
If implemented correctly PoS has two main advantages over otherwise similar PoW networks:
- It does not waste significant amounts of energy
- It can process transactions much faster
However, there are a number of issues with Proof of Stake networks that need to be considered carefully, including:
- How to initially distribute the cryptotokens amongst actors
- The potential for increasing monopolisation – the rich get richer
- The potential for 51% (by stake) attacks
- The potential for nothing at stake attacks and how to resolve forks
- The potential for long range attacks