Proof-of-stake protocols are a group of consensus algorithms for blockchains which function by randomly choosing validators in relation to their amount of stake in the related digital currency. Unlike a proof of balance protocol, PoS networks don’t incentivize extremely high amounts of electricity consumption as part of the proof of service mechanism. In this sense, PoS behaves more like a voting system rather than like proof of work. But what exactly is a proof of stake algorithm?
In its simplest form, a proof of stake algorithm is a mathematical formula that evaluates the statistical distribution of possible outcomes between any two validator transactions. On the Internet, such formulas are typically written as a series of numbers and their interpretation depends on the environment in which they will be used. However, there are several well-known variations of such algorithms, all of which have different applications in the context of public blockchains.
An example of such a variation is the Difficult Parity Algorithm (DPA), which validate blocks by taking the total number of possible outputs, modulo 8, and then dividing it by the total number of Validators. As is apparent from the name, the algorithm is designed to weed out invalidators, forcing them to choose between accepting a transaction from a new client and allowing it to be approved by the other Validators. The difficulty with such a system is that the number of Validators is quite low – it is in fact far lower than the number of Transactions Per Day (TPG) on the typical Internet chain. This problem is taken care of by Proof-of-Capacity (POA), a proof-of-work algorithm which is designed to quickly check the validity of the number of spendable Assets being used in an Asset Ledger.
One of the biggest problems with Proof-of-Stake (POS) is the popularity of it among miners. As soon as they see a profitable opportunity, miners eagerly race to mine it, pushing up the price to all time highs. In the long run, this can be very damaging to buyers, since the increased supply drives up the price. By contrast, if there are not enough Validators to cover the expenses of having a Validator account, the result is the opposite: the cost of securing a POS deposit drops, and buyers are able to obtain a more flexible product.
On the surface, both sides of the argument in what is called the Proof-of-Capacity debate assume that there is a perfect solution to the Byzantine Problem. In E-Commerce, however, there is usually no perfect solution to complex transaction problems, because every business transaction is subject to an alternative proof-of-stake setup. As such, the only way to guarantee smooth and safe transactions is to rely on one Byzantine Consensus system. This way, a business continuity plan can be developed that will guarantee that all transactions follow certain parameters that have been established by the network itself, thereby ensuring that the network remains viable for years to come. By using a combination of different proofs-of-stake technologies, such as proof-of-keys, proof-of-licenses, and proof-of-nets, a robust, scalable, and reliable global marketplace can be provided for buyers and sellers worldwide.
Proof-of-Stake Mining has the potential to provide solutions to the Byzantine Problem through a self-sustaining incentive system. The main motivation behind POS mining is a desire to increase the processing power of the network, therefore lowering the risk of having a transaction backlog. But by making each new block contains a specific piece of information, the number of confirmations needed for a particular transaction reduces. For example, if there was a backlog of transactions, the maximum number of confirms required would be two, whereas if each new block added only one extra bit of information, it would take only one confirmation instead of two. The resulting network protocol is called Proof of Stake (POS), and the system is used by many of the world’s largest financial institutions.