Proof of Stake (POS) is a consensus algorithm “get coins to mine coins”. POS coins are becoming the new trend in the field of cryptocurrency. A highlight of the POS coin is the staking form of the coin to increase passive income for the owner.
What is Proof-of-stake (POS)?
Proof-of-Stake (POS) is the blockchain’s consensus algorithm. In it, nodes must stake coins to participate in confirming transactions on the block. Simply put, the node must stake coins to verify the identity.
Surely everyone knows that the first cryptocurrency is Bitcoin using the Proof-of-Work (POW) consensus algorithm. POW allows miners to validate transactions and create new blocks by performing computations based on computer power. From there, a dedicated excavator with great configuration and high performance was born, helping miners compete in mining.
However, the crypto community quickly realized the weaknesses and disadvantages of the POW algorithm. In 2011, the Bitcointalk forum was the first place to raise the idea of a new algorithm called Proof-of-Stake (POS), which solves some of the problems faced by the POW algorithm.
By 2012, the first coin using POS was born. That is Peercoin (PPC). Since then, there have been hundreds of coins using the POS algorithm.
It is noteworthy that many coins originally used the POW algorithm, but are gradually converting to POS because of the advantages of the new algorithm. The most famous of these is Ethereum (ETH).
Besides improving from the original POS, many new algorithms were born. Such as Delegated Proof-of-Stake (DPoS) of EOS, Lisk, Steemit, etc. Or Tomochain’s Proof-of-Stake Voting (PoSV) algorithm (TOMO).
Terms related to Proof-of-Stake (POS)
Are the people, or organizations involved in confirming transactions, closing the block of a coin. By running specialized software for that coin, the node acts as a stabilizer in the blockchain, validating transactions for coin users.
According to the POS algorithm, not all nodes participate in closing the new block. Blockchain will randomly select a node to verify and close the block. This node is called a validator.
Forge or Mint
Is a phrase that only works to verify and close the validator’s block. To distinguish it from mine (digging) in POW.
In POS, a node that wants to become a validator must stake a certain amount of coins as a condition of participation. The meaning of this is to prove you own the coin.
Lock and Unlock
The number of coins staked by the node will be locked by the network. During the period of becoming a validator, these staked coins cannot be moved, or traded. If you don’t do the validator anymore, the new coin will be unlocked.
How does POS work?
The method of operation of the POS consensus algorithm can be summarized as follows:
- Of all participating nodes, the blockchain will randomly select one node (or masternode) to become the validator. This validator has the role of verifying and closing the block.
- To become a validator, it is necessary to stake an amount in the network as a condition of participation.
- Blockchain will lock this stake, and will unlock it after the node does not join the validator for a while, not immediately.
- If the block is valid and written to the chain, the validator will receive a reward from the transaction fee.
However, in order for the blockchain to be transparent and efficient, it is necessary to have an appropriate validator selection mechanism.
Random node selection
The Proof-of-Stake algorithm will randomly select the validator to verify the next block. By using the formula finding the lowest Hashrate, combined with the highest bet (stake).
Once the assets are made public, each node will “automatically” choose the account that is authorized to process the next block.
Option based on asset holding period
The POS algorithm also combines a random selection method based on the age of the asset (coin age) to consider (from the time the asset is held).
Node must hold coins for at least 30 days before participating in “running” as a validator for the next block. Thus, the node that holds more coins for a longer time will be more competitive.
After each time, the asset’s life will be “reset” back to zero and must wait at least 30 more days before being allowed to “run” for another block.
In addition, the maximum number of days to participate in the election is 90 days. This helps to avoid manipulation by nodes that own too many assets.
How to make money from a POS coin?
The cryptocurrency market is always profitable if you do it right. Not only POS coin, you can make money from other cryptocurrencies.
However, with POS, you will have many ways to make money, including active and passive.
Make money actively from POS coin
1. Coin Mining
You only need a computer connected to the internet to mine POS coins. Each coin will have its own mining instructions on its own website.
Not only POS coins, you can trade all kinds of cryptocurrency. However, with coins with POS algorithm, if your trading performance is higher than the stake interest rate, you should trade.
Trading is highly profitable, so it always comes with high risks. If you are a person who does not like to take risks, you can choose to hold and staking to receive interest only.
Earn passive income from coin POS
An advantage that only POS coins have is passive income from staking coins. You just need to send coins to a platform that supports staking, keep there, no need to move or trade anything, you can get more coins every month.
This method of making money will have an advantage when the market is “freezing”, the price drops a lot, or the market is sideways, with no waves to trade.
1. Stake coin on the “Original” wallet
Many coins develop their own wallets so that users can hold, receive and transfer coins to each other. Besides, the POS coin’s own wallet also has a built-in staking feature.
Users need to download the wallet, hold the coin, you can already receive the coin stake.
An example of this approach is TOMO with its own Tomo Wallet. This wallet app is available on Android and iOS, you just need to download and send coins to the wallet to stake.
2. Stake coin on the exchange
3. Earn money from staking wallet, staking platform
Stake coins on exchanges usually have low interest rates. Therefore, to maximize passive income, you can participate in reputable staking platforms.
Here are some platforms that allow you to deposit POS coins and receive interest:
For example, you can stake Cosmos (ATOM) on https://everstake.one/ platform with an interest rate of 13.02%/year.
In addition, there are now a number of cryptocurrency wallets that support staking coins for users. Names can be mentioned such as Trust Wallet, Cobo Wallet, HashKey Hub wallet, etc.
Review Proof of Stake
Advantages of POS
- Increase the number of coins of the holder. So even if the price drops, you can still make a little profit from your coin.
- Mining POS coins does not need a machine with terrible configuration, just a computer with internet and online 24/24, you can already dig.
- POS mining cost is much cheaper than POW. You do not have to spend as much energy as mining POW coins. If you don’t like to dig anymore, you can transfer the coin to the exchange and sell it.
Disadvantages of POS
- Staking is not always profitable if stake interest is lower than coin discount then holders will lose.
- Staking interest is not always uniform.
- Risk of being scammed, scammed, etc. if you choose an unreliable staking platform, or choose a “junk” coin.
What is network monopoly?
If one party takes control of the majority of the transaction validation resources, the entity can use the resources to impose conditions on the rest of the network. From there, the monopolist can choose to engage in malicious practices such as double-spending or denial of service.
If the monopolist chooses a malicious strategy and maintains its control over the long term, trust in the blockchain network will be destroyed.
How does POS solve the monopoly problem?
Coins that use the Proof-of-Stake algorithm can still have monopoly problems. However, the POS network is more secure against malicious attacks. For the following two reasons.
Firstly, it is very difficult to monopolize the POS network. As mentioned above, Masternodes must hold and stake coins to participate in transaction verification. If you want to monopolize, holders must buy and hold a lot of coins (at least 51% of the total supply). The cost is enormous.
Second, and more importantly, the monopolist has no interest in harming the network in which he is investing so much money. Adverse attacks on the network will cause investors to lose confidence in the coin, thereby reducing demand, which will lead to a decrease in price. Thus, the monopolist’s staked coin fund is also damaged.
Compare Proof of Work and Proof of Stake
PoS is an improvement of PoW, so it has more advantages:
Since there is no need to compute complex hash functions, the PoS network takes much less time and energy than PoW.
The network uses a more secure and decentralized POS algorithm than PoW.
With PoW, mining is currently only effective with large, high-power mining systems. This leads to the power of the whole system mainly concentrated in large mining pools. Make the PoW network more centralized.
Frequently asked questions
Is Proof of Stake safe or not?
As explained above, the POS network is more secure than POW. Due to the staking mechanism, more masternodes can participate in validating transactions on the Proof of Stake network, leading to more decentralization and security.
In addition, it is difficult to attack 51% on POS coins because the cost is very high.
Why does Ethereum want to move to Proof of Stake?
Ethereum wants to move to Proof of Stake because POS offers many advantages and has a solution to the problems that the Ethereum network is facing.
Proof of Stake promises to solve this problem. Running a validator requires a lower cost than miners.
- Ability of extension
Some of Ethereum’s scalability problems can be solved more easily with PoS.
The POS algorithm is more secure and decentralized than POW. Because the ability to attack 51% and malicious attacks on the POS network is much more difficult.
Can POS be used in a private/consortium chain?
The answer is yes.
Any Proof of Stake can be used as a consensus algorithm in the private/consortium chain. The only change is the different validator selection. With private/consortium chains, the first validators are groups of trusted users. It will then be up to the previous validator to vote further when a new validator is required.
Does a POS exchange pose the same risk of centralization as POW’s mining pool?
The answer is NO.
Proof of Stake exchanges hold a lot of coins because of concentration from user funds. However, the exchange cannot become a monopoly, or attack 51% on the network because users need to withdraw coins. The exchange cannot stake and lock all users’ coins.