This post is the fifth post in a series dedicated to demystifying blockchains. The fourth post introduced the most famous lottery-based consensus: Proof of Work (PoW). This post presents another type of lottery-based consensus: Proof of Stake (PoS).
With PoW, the entity that has the highest calculation power has the highest probability to be the elected validator of the block. With PoS, the entity that has the highest stake in the system has the highest probability to become the elected validator of the block. Each potential validator, so called forger, puts some collaterals in escrow. Would the elected validator cheat, then thisvalidator would loose the escrowed collateral. Obviously, the collaterals cannot exceed the validator’s owned wealth.
The security assumption is that the more stakes you have in a system, the more you are expected to defend this system in order not to lose your stake. Thus, the underlying hypothesis is that the highest stakeholders are acting rationally. Furthermore, like with PoW, there is an incentive to forge. The forger who validated a block is rewarded with some coins (and the transaction fees).
PPCoin implemented the first PoS. It uses the concept of coin age. The coin age is the number of coins multiplied by the holding period of these coins. If Alice holds ten coins for 20 days, then her coin age is 200 coin.day. The collateral is a number of coin ages bidded for validating the block. Indeed, Alice bids n coin ages by paying herself these n coins. The forger must solve a kind of PoW, but the challenge is inversely proportional to the collateral, i.e., the space of search decreases when the collateral increases. Thus, the winning forger is most probably the forger with the highest collateral.
Buterin Vitalik, the founder of Ethereum, introduced Casper: a PoS based on Byzantine Fault Tolerance. Casper has a set of volunteer validators. Each validator commits a number of ethers as a deposit. Casper defines an epoch as a set of 100 consecutive blocks. Roughly, Casper validates an epoch once a number of validators whose aggregated deposit represents more than 2/3 of the total deposit validated the epoch. The assumption is that if less than 1/3 of the validators cheated, they would be detected and identified. In that case, the community would remove their escrowed collateral through a hard fork.
The main advantage of PoS is that it consumes far less computing power than a PoW-based system. Usually, PoS has also less latency than PoW. The main latency is for the minimal time that collaterals are escrowed.
According to me, the trust model of PoS is weaker than the trust model of PoW. An ill-behaving majority stakeholder may attempt to use her advantage to take an even more significant stake. Furthermore, the stakeholders are expected to act rationally. This assumption may be weak in case of a state-funded attack which may have objectives other than monetary ones.
Even with a rationale player, there may be some weakness. If the gain of a misapproved transaction exceeds the loss of the escrowed collaterals, it may be a rationale decision to cheat. For instance, PoS is prone to “Nothing at Stake” attack. Alice may have a significant stake at time T0. She cashes all her stake at time T1. At T1, she has no more stake but has gained some benefits. As she has nothing to lose anymore, she may attempt to attack the blockchain at T0 when she had the majority of the stake. She attempts to start a new branch from T0, using all her then available-stake as collateral. Having a higher stake, she has good chance to win and thus begin a new branch where she would own again the already spent stakes. Would she not win, she would have lost nothing. Of course, T0 and T1 must be close.
PoS is faster and less power consuming than PoW. As such, this type of consensus may overcome some of the issues of PoW. Nevertheless, its trust model seems weaker. I foresee that we may see new PoS protocols in the coming years.