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Cryptocurrency,  Technology

What is Proof of Stake (PoS)?

Many of the cryptocurrencies that exist in the market have a similar way of functioning in general terms. Most have decentralization as a fundamental concept. That is, the survival and evolution of the currency does not depend on an organism but depends on a community that cares and works with it.

The community after all consists of a set of connected computers that facilitate transactions and the operation of the currency, developers who constantly incorporate improvements and define the way forward in these improvements and the users of the currency .

“How the community is organized and how decisions are approved is the role of the consensus algorithm.”

Origin of the consensus algorithm

Bitcoin settled a way to work. To validate the transactions, the miners (the computers that validate the transactions) must, for each transaction, dedicate a lot of effort (time and electric power) to get the consensus that would allow to say that this block or set of transactions was valid. The word consensus is what defines and differentiates blockchain: it will be a single computer that manages to find the solution to validate a block that has many transactions attached, but at the same time, many other computers will have wasted energy and time to avoid the first ones and it will be these who receive the solution of the first. If the calculations of the miner who has found the solution are correct, the rest of the miners will give their approval and consensus will be achieved, transferring that block in a definitive way to the chain of blocks.

“This process is called Proof of Work (PoW) and is a consensus algorithm that is becoming increasingly obsolete because, among other things, it spends a lot of energy.”

The new algorithm, Proof of Stake or PoS

With the premise of trying to find efficient work began on new algorithms. It was then that we were able to see cryptocurrencies that use another algorithm: the Proof of Stake.

Imagine a coin that uses this algorithm. You could buy a certain amount of it and have it in your own wallet on your computer. This would give you the ability to be able to become an authorized node to validate transactions.

How do you choose who validates the transactions?

The algorithm defined by the cryptocurrency will be the one that chooses the person who will propose to validate a block or set of transactions. Among all the coin holders, a validator will be chosen randomly among those who have more coins. Yes, among those who have more coins. The reason for choosing those with a greater volume of them is because these people are the most interested in the development and evolution of the currency going well. Any rumor or news about possible frauds in the validations would pull the price of the currency down because users would start selling them in the markets. It makes sense, then, that those most interested in the currency not losing value or suffering problems are those that have more volume.

The validator “forges” an existing block (in the case of the Proof of Work algorithm the blocks are generated from scratch) and sends it to review other users, who certify that it is correctly validated. The validator is at this moment who receives the commissions of the transaction.

What conditions do I have to validate PoS transactions?

Basically what you will have to do is freeze for a certain time (it is similar to a fixed term of a bank) the coins. During this period you will not be able to sell them and they will become the guarantee that you are doing things right. In the event that you intentionally generate invalid blocks with the aim of corrupting the network, the slashing conditions will begin to act, which are the rules that define the “fines” that you will have to pay in that case. You can lose your funds completely, so it makes sense that the validator will always want to do things right. It is more than likely that what you lose is greater than your own benefit.

As every algorithm with time is improving and optimizing. One of the biggest and best known risks in the PoS is the possible attack of 51%. That is, what happens when a user owns more than 50% of the currency and ends up taking control. In future posts we will address this issue that also has a solution.

Find more information within the following video:

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