Why is PoS (Proof of Stake) so hot? Why is the "PoS first year" in 2019? What is Staking Economy?
We specially invited Grace Yu, the head of the Cobo PoS Ecology, and the beautiful young lady Grace Yu to share and exchange the hot topic of PoS in the near future. The following is the sharing content, super hard core! At the Cobo conference, Shenyu mentioned that 2019 is the first year of Staking. At present, there are more than 80 blockchain projects in the PoS mechanism, and the total amount of funds in the Staking equity pool is as high as $6 billion.
First, let's first take a look at what Proof of Stake is?
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PoS is a general term for a consensus protocol in the blockchain technology. Many people have compared it to the earliest PoW consensus algorithm. To understand the system, let us first explain some key concepts.
What is the main task of the Consensus Protocol on the blockchain?
The root of blockchain technology is that in a distributed system, multiple nodes jointly maintain a non-tamperable, transparent and transparent account on the P2P (Peer to Peer) network. Since it is a common maintenance, when a new transaction record is generated, which transaction record is reasonable and can be recorded in the chain, each node on the P2P network is determined by a certain algorithm. This algorithm is called the Consensus Protocol. The characteristics of the consensus agreement determine the security, performance and decentralization of a blockchain.
The flow of the block can be roughly divided into the following five steps, and the cycle of each block is generally called Epoch.
The two key steps of the block-out process are closely related to the consensus agreement (Consensus Protocal):
- Packing a new transaction record for a period of time to generate a block (Block Creation);
- In all generated blocks, verify the block and confirm the Block Validation.
The first consensus agreement Pow (Proof of Work)
PoW (Proof of Work) is the earliest consensus algorithm for blockchains. Born in Bitcoin, Ethereum (now still) also adopted the PoW consensus. Pulling out the top 100 currencies in the market capitalization, most of them still use PoW, but obviously see more new projects adopted or over-provisioned PoS (Proof of Stake), such as Ethereum.
The node that participates in the PoW block is called Miner. This process is commonly called Mining. The process of the block is that the miner packs a certain amount of transactions, solves a puzzle by the group method (Brute and Force), the first node network puzzle answer and block information to solve the puzzle, other miners verification area After the correctness of the block and the puzzle, the block is included, the block height is increased, and the next round of the block process is entered. The nodes that solve the puzzle get Block Rewards.
Proof of Work is actually doing a good job in terms of security and decentralization. After all, Bitcoin has been safe for 10 years and is still a good decentralized network. However, as the number of participants increased, his drawbacks became more and more obvious.
- With the fierce competition, it is necessary to purchase professional mining equipment to make the participation threshold higher and higher;
- Mining requires a lot of power resources and is protested by many environmentalists. It is predicted that by 2020, the power consumption of bitcoin mining will be equal to the electricity consumption of Denmark Denmark;
- PoW sacrificed TPS (Transaction Per Second) for security and decentralization. According to Blockchain.info, the TPS peak of Bitcoin is only approaching 5 TPS. And when there are more transactions, it is easy to cause network congestion and transaction costs soar. At that time, the phenomenon-level application encryption cat on Ethereum was a famous case of blocking Ethereum;
- There are also economic reasons. Because the miners have the initial investment and the electricity bill, the excavated coins need to be converted into French currency to pay the electricity bill, which will bring continuous selling pressure to the PoW currency.
The PoS (Proof of Stake) Consensus Protocol is a general term for new consensus algorithms that can be used to better address the growing problems of PoW. In terms of literal meaning:
- Proof: Evidence that blocks of transactions are legitimate
- Stake: The value of the address on the node is relative to the value of the network (Relative value held by an addresses on the node)
Although it has recently caused a high degree of heat, the concept of PoS has been proposed as early as 2012 and was first adopted by Peercoin. Its essence is that Node / Validator obtains the right to block or verify a block by pleasing part of the asset (Staking). It corresponds to Miner and Computing Power in the PoW network.
The following is a comparison of PoW vs PoS in 5 outflows:
Let's talk about "PoS"
For digital asset holders, referring to PoS (Proof of Stake), perhaps the most direct word in the brain is "Passive income", because on the surface, users buy a certain amount of PoS. In the currency, a certain amount of income can be obtained by pluring (Staking). Compared to PoW mining, this can be understood as a mining operation that requires only capital input, referred to as “PoS mining”.
In the process, you may notice a lot of different PoS-based projects and PoS-like consensus protocols. For example, DPoS (Delegated Proof of Stake), PBFT (Practical Byzantine Fault Tolerance), DBFT (Delegated Byzantine Fault Tolerance). There is also Proof of Authority (PoA), Proof of Believability (PoB). How to read their token economy, income distribution rules, future prospects, security and stability and other important indicators, let's take a look at the system below.
Regardless of how the PoS consensus protocol evolves and optimizes, it is rooted in the fact that different algorithms are used in the three processes that are out of the block.
- Conditions to become candidate nodes (Validator Candidates)
- In each round of the block process, who chooses from the candidate nodes to make a block node (Block Creation Validator)
- How to confirm the correctness of the block and up chain (Validate Blocks -> reach finality)
Below we divide the PoS consensus agreement into the following five parts based on similarity or historical origin:
Part 1: Traditional Proof of Stake and Masternode
The traditional PoS project becomes a candidate node with a relatively simple process. As long as you slap a certain amount of coins, you can have a block right. The process of exporting generally depends on the amount of currency or the age of the currency, that is, the higher the amount of coins in the staking (Staking), or the greater the product of the amount of the coin and the age of the coin. The probability that a block is randomly selected is larger.
The verification block usually randomly selects X candidate nodes for block verification. Or some projects will use Masternode to verify the block. (Masternode is a PoS-like node, but there are essential differences, we will explain later)
The traditional projects using PoS were Peercoin, NXT, Blackcoin, Neblio. Some projects mathematically optimize this process to derive variants, such as DCR, which dynamically adjust the difficulty and number of nodes as the number and price of tickets.
Masternode vs PoS
For those who know more about the PoS ecosystem, you may find that some blockchain projects use the Masternode mechanism or use Chinese as the main node. Many people talk about Masternode's projects as PoS projects. Although they all provide Passive income from the outside, they are essentially different.
First, Masternode is a server node with special functions on a decentralized network. For example, in a DASH network, Masternode provides Direct Send and Instant Send functions, and Masternode has governance rights and the network proposes to vote. Because of the special features of Masternode in the network, you will receive certain rewards. The incentive period and number of each chain are different. But unlike PoS, its rewards are relatively fixed, so it is relatively certain from the perspective of calculation year.
In addition, Masternode's participation threshold is higher, not only need to prove that there is a certain amount of coins, but also need to operate nodes to provide services for nodes. But unlike PoS, the locked currency is not “staking” but “proving possession”. Once a node proves that it has reached the currency, it can become a network service node and participate in network dividends, but it can also be unlocked at any time. Therefore, the coin that is "locked" on Masternode is essentially mobile, and he does not have a long-term lock contract.
Last but not least, Masternode is a secondary node, not a consensus node, so it is not responsible for generating blocks and verifying blocks. So you will find that Masternode does not become a blockchain alone, it must coexist with the blockchain of PoS or PoW. Some places also refer to Masternode's dividend method as Proof of Service or Proof of Commitment, but it is not a consensus agreement.
Looking at the Masternode Eco project, the Masternode model has only a small portion of the top 100 market capitalization projects. The most famous of these are Dash (7% annualized), PIVX (14% annualized) and XZC (27% annualized). Since Cobo was the first wallet to offer Masternode and PoS gains, these currencies are already supported in Cobo.
If you expand to the top 3,000 projects, there are probably more than 200 Masternode-based projects (masternodes.pro), but the market value is small. Although the annual gain of some projects can be up to 5 times, the existence of the project after 1 year needs to be carefully evaluated.
Part II: DPOS (Delegate Proof of Stake)
The conditions for becoming a candidate node are relatively high and slightly centralized. He needs professional servers and operation and maintenance personnel to maintain the security and stability of the node. In terms of qualification, not only does it need to pledge a lot of money, it attracts users to vote (Voting), but also requires certain organizational strength as an endorsement of the node.
The project using the DPoS consensus protocol will limit the maximum number of nodes X. Each currency of the currency holder user corresponds to a certain number of voting rights, and the user will vote for the node that he trusts. The top X nodes are ranked as block nodes according to the number of voting.
In each round of the block, the node is usually Round-robin out of the block, as long as (2/3 + 1) outbound nodes verify that a block passes, then the block is finalized.
DPoS is a derivative of PoS, and the process of exporting is relatively simple, which greatly enhances the network TPS. The representative currency is LISK (101 nodes) and EOS (21 nodes) TRON (27 nodes). The founder of EOS, Bitshare, Steemit once wrote an article on input analysis DPoS, and interested readers can study [DPOS Consensus Algorithm – The Missing White Paper
Although the DPoS protocol is relatively simple and comes out quickly – usually within three seconds. But the problem is also obvious: not enough to centralize. This is not safe enough as a public chain system as a value store. However, as a highly scalable side chain system consensus agreement may be a good choice.
Part III: (BFT Byzantine Fault Tolerance)
BFT (Byzantine Fault Tolerance) originated from the famous Byzantine General and was mentioned in the 1982 article. As its name suggests, he solves a consensus algorithm in a system where even one-third of malicious nodes can function properly.
BFT's algorithms are used or optimized for many projects. For example, Cosmos's consensus layer Tendermint uses PBFT (Practical Byzantine Fault Tolerance). NEO is the first project to propose the DBFT (Delegate Byzantine Fault Tolerance) algorithm. Although derived a lot, in essence he can be summarized as the following process.
The premise of becoming a Validator is to pledge a certain amount of money, namely Staking. At the same time, other money-holding users (Delegators) can grant (Delegate) the currency of the same currency to the supported node (Validator). Similar to DPoS, the top x-name nodes in the sum of currency and ticket rights can participate in the block. But the essential difference from the DPoS mode is:
- The BFT consensus does not deliberately limit the number of Validator nodes, because unlike DPoS, if the number of nodes (Validator) exceeds 101, the risk of nodes cooperating to do so is greatly increased. Like Cosmos using BFT, although the main online line is limited to 100 nodes, it is proposed to increase each year;
- Validator and Delegator Locked or authorized coins, if they do evil at the node, will be punished by the system (Slash). There is generally no such rule in DPoS. It relies entirely on the background and reputation of the node to ensure the correctness of the block, so it is more central;
- In the BFT system. The benefits of delegation are actually more deeply bound to the Validator. If the node is evil, the authorized user (Delegator) will also suffer corresponding economic losses. In DPoS, voting (Vote) voting only gives node votes to support the table;
- Another difference is more biased in technology, which requires a synchronous clock (Clock) during the block coordination process. This places high demands on system performance in a distributed system. However, the BFT algorithm is asynchronous, and the time requirement for uniformity is broader, so that more nodes can be expanded, making it possible to extend a more decentralized system.
The BFT block node selection and verification block is similar to DPoS. The node rounds out the block, and the block rewards are positively correlated with the ranking. When each block is verified by 2/3 nodes on the network, it is successfully rewinded (Reach Finality)
Part IV: Expansion of PoS / DPoS / BFT (Extended PoS)
Derivative consensus protocols based on traditional PoS, DPoS, and BFT basically satisfy their basic attributes, but have been improved and optimized on some conditions. Here are some examples of representative projects and protocols:
Tezos: Liquid Proof-of-Stake is similar to DPoS, but the number of nodes (Baker) is not fixed, up to 80,000. Similar to BFT, there is also a punishment mechanism for evil. Each round of the block nodes is randomly selected, and the other 32 stakeholders are selected (endorse) to be out of the block.
Algorand: Pure Proof-of-Stake's famous claim can solve projects in the blockchain where triangle problems are impossible. His way is that each round of the block, each node of the stake can run an encryption algorithm locally to obtain a token (Token) to know whether it is out of the box in the next round. If yes, broadcast the information to other nodes themselves. After the block is released, 1000 tokens are selected for the block finanlity. The advantage of this is that each time a block is randomly random, a malicious node cannot continue to be a block node. Moreover, each time the block node and the verification node are randomly selected, DDoS attacks can be effectively avoided.
Near: Thresholded Proof Of Stake This project is dedicated to the blockchain on the mobile side, so the consensus protocol needs to support a million-level consensus node. The optimization direction of Threshold is to select the owner of 1024 seats (Seat) among the million nodes in each outbound time. The price of each seat is determined by the number of total Stakes in the network. The holding node of 1024 seats can be deblocked and verified. The amount of collateral for the block node needs to be locked for three days before it can be redeemed.
IOST: Proof of Believability is a hybrid PoS that enhances the way in which candidate nodes are selected. The number of Staking and Delegate Votes is only a threshold for Validator, and nodes need to prove their contribution to the community, user behavior, technical strength and response time to gain more node benefits.
PoA Network: Proof of Authority is a modified PoS. The difference is that the value of the value of the currency of Staking is not used to determine the value of the node (Validator), and the true identity of the node is used as the trust guarantee of the node.
Part 5: Proof of X and beyond
The Proof of Stake and derivative consensus protocols mentioned above are based on the public chain to ensure the security, performance and decentralization of the public chain. It is not only the basis of the public chain's Native Token value storage, but also the guarantee of ownership and security of DApp application assets on the public chain. However, in addition to optimizing the consensus protocol itself, the concept of Proof of Stake has been extended to the Work / Utility Token.
Livepeer is a video encryption and transmission application. Its Token LPT is based on Ethereum's ERC20. LPT's Proof-of-Stake is based on a special application for video encryption scenarios. Stake LPT's nodes are no longer Block Validators but Video Encryption Services (Transcoders). The more Stake LPTs are selected, the more likely they are to be served, and the more they gain.
FIlecoin is one of the hottest ICO projects in 2017. The consensus protocol used by the protocol layer IPFS is Proof of Spacetime / Proof of Replication. Filecoin is a project for file storage and reading of specific application scenarios, so the nodes are based on the storage provided or The service being read gets the benefit. Staking is the way to get the right project.
Does it feel a bit like the Masternode mentioned earlier? ?
Part 6: Words written in the back
As mentioned earlier, PoS and its derived consensus protocols are diverse. His essence is to select different methods and algorithms to optimize security, performance, and zone-centricity in the following three processes.
- Condition to become a candidate node (Validator Requirement)
- Block creation method (Block Creation)
- Block Validation
As new projects evolved into the home network, we noticed that many Layer 2 (2nd Layer) solutions that improve privacy and scalability tend to use PoS consensus protocols. If you are interested in this part, let Cobo know, we will share the next time. ?
Staking Economy Model (Staking Economy)
Just as PoW's block reward model has inspired the birth and prosperity of the miners' mining industry, whether the PoS ecosystem can be closely related to long-term development and economic incentives. Let's talk about the basic incentive model in the PoS consensus, and how to hold the Passive Income as a way for the holders to smear in the many choices of Staking or Delegating.
The gain rate of the Proof of Staking consensus system is not as straightforward as the Masternode's gain bonus, as it usually comes from three dimensions.
- Annual inflation rate: The inflation ratio of most projects is inversely related to the proportion of coins in the node Staking. The purpose is to adjust the relationship between the amount of Staking and the amount of currency. For example, the increase in the annualized rate of revenue of the network Staking will attract more coins for pledge, and the amount of currency in circulation will certainly decrease, thus affecting the use value of the economic system. At this point, the number of inflation incentives is reduced according to the pledge rate, and the proportion of Staking is counter-incentive to achieve dynamic equilibrium.
- In the inflationary currency, as a percentage of the block rewards, it is measured whether the project accounts for a large portion of the Staking economy.
Block fee / service fee
- The transaction fee reward gives a positive correlation between the work income of the block node or the service node and the network usage. This is also in line with the spirit of the blockchain. The blockchain is the Adoption system, and the more users involved, the greater the value of the network.
Project party reward
- The project party will provide certain subsidies or rewards in order to encourage the participation of the nodes after they have just joined the main network. This part of the reward will gradually decrease with time and the completion of the project. Therefore, many projects generally have higher gains when they first go online, but as user usage increases, transaction fees or service fees will compensate for this reduction.
In the selection of pledge (Staking) and voting (delegating / voting), as a general holder of the currency, what aspects of the node of interest to ensure asset security and stable income?
We will not pay attention to the change in the value of the legal currency brought about by the fluctuation of the currency. Our discussion is first limited to the “energy model of the currency”, that is, the gain of the currency.
1. DPoS / PoA-based project, see the node team and its true identity
They generally represent the interests of the project. May be an investor, a community, or a Staking Service (such as Cobo, a brand that has established a brand in the PoS space?). Nodes with tightly bound interests will target the interests of users and the growth of projects. It’s reliable to make money with them.
2. Derivative PoS with a penalty mechanism such as BFT needs to pay close attention to the technical strength of the node.
If the dropped line does not come out, or if a malicious transaction is included for some reason, it will be punished by the agreement (Slash). At this time, not only the node (Validator) will be punished by the economy, but also the node's holder (Delgator). Will suffer losses.
There are many ways to pledge coins, sometimes pledge in a hot wallet. So the server security of the node is a very important consideration. Whether the server is in a secure data center or cloud service, whether there is DDoS protection, and whether there is a secure hardware encryption module (HSM) to protect the Validator server. The PoS ecosystem has only just begun, and there are still few coin-losing events, but it is a huge incremental market. After that, it will happen like the time when the money is lost during the development of PoW.
3. All PoS projects, market value ranking is very important
The blockchain is still in a period of rapid development, which means that there will still be risks of zeroing off most projects. Some projects have an annualized gain of 500%, but the market value is indeed 4 digits. Please keep your eyes open and no one wants to pledge their coins to the Ghost Project.
In addition, from an economic point of view, the greater the market value means that the larger the economy, the lower the system risk. Make money with sharks.
The holder of a general vote (vote) or delegation (delegate) node will pay 5-20% to the node as a service fee. The percentage of nodes charged for service fees is different, which affects the annualized rate of a part of the user. Cobo's mission is to build long-term profitability with the user, so in terms of service fee collection, it will optimize execution efficiency and stability, so that the maximum possible rebate to the user
In addition to the project itself, the user's own characteristics and needs also need to be considered. If you only want simple gains and don't want to worry about node qualification or technical configuration and monitoring issues, then you can choose Staking Service.
- The first Staking Service provides technical facilities, and their strength lies in node operation and maintenance. Suitable for wanting to be a Validator but don't want to build and manage technical facilities on the VPS.
- Staking Service provides node services, which often establish nodes themselves through fundraising or capital, attracting money users to vote or delegate (Delegate) to their nodes. This service is sometimes referred to as Pooling.
- Staking Service is smarter, and users typically choose to host digital assets with service providers. Depending on the project, the service provider may vote for the Validator or centralized users to vote or delegate other validators. The service provider will use the network revenue, node qualification to optimize the voting ratio to maximize the profit with the user and avoid system risks. For users, it is a worry-free gain.
Source: Cobo wallet; Author: Grace Yu
Editor's Note: This article does not change the original intention of the author.