Proof of Stake — What is and how does it work?

With Ethereum moving to 2.0 with the Proof of Stake, everyone starts talking about it. By the way, at the end of the article, I show how to start earning with Ethereum 2.0 staking (not financial advice tho).

The mechanics and incentives of proof of state algorithms work differently. When creating a new block, the proof of stake algorithm chooses who is the block validator by checking how many coins a person is staking. The bigger the stake, the higher the probability of being chosen as a block validator. In proof of stake, we call the nodes doing the work block validators instead of miners, and we say that block validators mint new blocks instead of mining new blocks.

When a new transaction is issued, it is placed into a block with other transactions, and the block is limited to a certain size in MB. The validating node verifies the transactions’ validity in a block and broadcasts the block to the other nodes in the blockchain. After validating the block and sharing it with the other nodes, the validating node will receive a reward if the other nodes agree with the content of the block.

Ethereum is moving to Ethereum 2.0, integrating Casper, a proof of stake consensus mechanism that will switch Ethereum from proof of work to proof of stake. The new Ethereum proof of stake protocol demands block validators to make a security deposit for the validator to be able to participate in the consensus. If they create a fraudulent block, their deposit will be forfeited, and the block validator loses the ability to participate.

Pros and cons of proof of stake

Pros

• It doesn’t require much electricity when comparing to proof of work
• It’s considered safe and resilient to 51% attacks when comparing to small proof of work cryptocurrencies

Cons

• Nothing at stake problem
• Fake stake attack and DDoS attacks — somebody can lie on how much stake do they own in order to connect to another node and flood him with connections (DoS attack)

In proof of stake, block validators increase their chance of being selected to validate a block based on how much do they have at stake. Bigger the stake, the higher the odds of being selected to validate the block and win then reward. In other words, the more lottery tickets you buy, the higher the probability of winning the prize. Following the example of our chart, let’s say Eve bought ten lottery tickets, Frank bought 20 lottery tickets, and Carol bought 30 lottery tickets, increasing this way her chance.

To perform a 51% attack, one’s would need to buy at least 50% of the cryptocurrency available, which would be very expensive. Most of the proof of stake mechanisms have protections against this, but performing a 51% attack on a proof of stake cryptocurrency wouldn’t be very smart anyway.

Although it would be very expensive for someone to acquire 51% of all the coins of a cryptocurrency, a person could indeed do it and try an attack. However, it wouldn’t be in his best interest to attack the network on which he holds a majority. This would harm the network and make the cryptocurrency value to fall, which means that the attacker’s holdings would also fall. Consequently, someone who holds a majority in the network would be incentivized to maintain the network secure.

How does the proof of stake block validating or “mining” works?

The bigger the stake, the bigger the chances of being the chosen one for that specific round. In a network of nodes, Carol was selected to be the validating node of the round.

1. Carol is selected to validate the block for that round

2. Carol has to place a larger stake than the transaction fees and rewards that he may receive. This stake will be locked until the validation is completed

3. Carol produces a block with transactions

4. The new block is broadcasted to the other peer nodes on the network

5. A fixed amount of time needs to elapse in order to allow time for the peer nodes to confirm that Carol did a good job and that he validated the block correctly

6. If the validation is correct, the block is permanently appended to the blockchain

7. If the validation is incorrect (i.e. has incorrect data, incorrect transactions, or Carol tried to forge some fake coins for herself), Carol will lose the stake and reward and probably also get banned from the network

Bonus: How to start participating on Ethereum 2.0 staking

If you have a Binance account (and probably a few other exchanges), you can start locking your ETH and earn interest. You can basically lock your ETH for a period of time (2 years I think) and earn interest which can go up to 20%. Note that the locking period can be up to 2 years here.

This Ethereum 2.0 is the long-awaited upgrade to the Ethereum network that is going to switch it to proof of stake and make it more scalable, spend less electricity (because it’s proof of stake) and better efficient. In theory, this will happen without impacting security and decentralization.

🚀 Follow me and please also check my 🧱 blockchain book and course:

🐶 The First Ever Dogecoin Course

👨‍🎓 Fintech, Cloud and Cybersecurity Course

📖 The Complete NFTs Course

👨‍🎓 Unblockchain Course — The Brain-Friendly Blockchain Course

Source: https://medium.com/nerd-for-tech/proof-of-stake-what-is-and-how-does-it-work-1c8bd7f00303?source=rss——-8—————–cryptocurrency