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Proof of Stake, just like Proof of Work, is a consensus mechanism used to achieve an agreement between all the different members of a decentralized network. It was first publicly proposed on Bitcointalk forum in 2011, by a user called QuantumMechanic, as a way to solve some of the problems found in Proof of Work.
Unlike the Proof of Work system, in which the user validates transactions and creates new blocks by performing a certain amount of computational work, a proof of stake system requires the user to show ownership of a certain number of native network cryptocurrency coins or tokens. This happens by the user locking up a certain amount of coins through his node wallet as a stake, and if the node is online it will participate in the Proof of Stake process and get selected to be the next block creator.
The creator of a block is chosen in a pseudo-random way, and can be based on a number of factors that include the amount being staked, the age of coins in the node wallet, and general randomization. Users who validate transactions and create new blocks in this system are referred to as forgers. In the proof of stake system, blocks are said to be ‘forged’ or ‘minted’, not mined. When a staking node is chosen to forge the next block, it verifies if all the transactions in the block are valid, then signs it and adds to the blockchain, which is sent to the rest of the network.
Cryptocurrencies that use Proof of Stake as a consues mechanism tend to pre-mine all of their coins which are sold off in an ICO, or they start with Proof of Work consensus mechanism which encourages fair distribution of the coins, and then later switch over to Proof of Stake.
Proof of stake systems are more environmentally friendly and efficient, as the electricity and hardware costs are much lower than the costs associated with mining in a proof of work system. A greater number of people are encouraged to run nodes and get involved because it is easy and affordable to participate in this system; this, in theory, results in more decentralization.
For Proof of Stake to work efficiently and not to favor the wealthiest nodes on the network, unique methods have been created and implemented by various projects. The most popular being “Randomized Block Selection” and “Coin Age Based Selection” methods.
Used by Cryptocurrency projects like Nxt and BlockCoin, the forgers are selected by a formula which looks for a user with the combination of the lowest hash value and the size of their stake. Because the size of the stakes are public, the next forget can usually be predicted by other nodes on the network.
This selection method selects the next forger based on how long their coins have been staking. Once a node has forged a block, their coin age is reset to zero and they must wait a certain period of time to be able to forge another block - this prevents large stake nodes from dominating the blockchain. Because a forger’s chance of minting the next block increases the longer they fail to find one, all participants can expect to mint new on a regular basis.