What: Proof of Stake (PoS) is a consensus algorithm alternative to Proof of Work (PoW) that issues cryptocurrency based on an existing stake (i.e. wealth or time) that one is active in it. In many implementations, block creation is random amongst stakers and compensation is often structured to make an attack less advantageous for a malicious actor since their influence is a direct reflection of their stake.
Why: Two important reasons given for using this alternative is:
- PoW follows Moore’s Law meaning the infrastructure needed to mine increases exponentially as does the amount of electricity consumed by miners which,…
- Creates pools that consolidate mining and thus an inevitable consolidation of hash power in a PoW based system. Which is essentially what BTC has today. (Nov 2019)
Example: in PoS a 51% attack could only be launched by a staker with 51% of the network hash, making that attack vector highly unlikely. In some PoS scenarios there are no imposed limits on the number of active miners, but participation is regulated financially by requiring deposits (which an attacker would forfeit). In other scenarios there are imposed interest rates if there are too many miners and the reward increases if there are too few.
PoS detractors claim the above is a concern primarily because it imposes rules that are akin to a hereditary system where competition gives way to existing stakes that encourage HODL’ing which eventually consolidates power far beyond a PoW based system.