POS has become one of the hottest topics in the field of cryptocurrency. But what exactly is POS? This guide answers this question comprehensively.
At the highest level, POS proves to be an algorithm that helps blockchains reach consensus based on user token ownership rather than mining stakes. To help you understand what this means, we will start by explaining the network consensus, which is the goal of all POS systems.
What is consensus?
Imagine that you are planning to have dinner. If you are a person, you don't need to agree with anyone on anything. You are free to choose to eat McDonald's, KFC or just a healthy salad. But if you are eating with a group of people, you may need to negotiate. Everyone must agree on a meal choice before eating.
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The same is true of the consensus in the blockchain. Since blockchains often lack centralized leadership, no single authority can verify transactions. Just like group meals, the network must agree on whether blockchain transactions are effective. This collective agreement—making a large number of network nodes agree that a transaction is valid—is called consensus.
In other words, it is like our dining analogy. If you and your friends can agree on a restaurant, you will go and everyone can eat. If the network nodes on the blockchain mostly agree that the transaction is valid, then a consensus will be reached and the transaction will enter the chain. But if you and your friends can't agree on the restaurant, you don't go anywhere. Similarly, if there are enough network nodes disagreeing that a transaction is valid, then the transaction will not enter the chain.
The initial consensus was: POW
Bitcoin pioneered password coherence with its Proof of Work (POW) system, which allows the safe operation of a large, decentralized system that has never been shut down.
At the basic level, the POW works by having each block creator use a numeric "symbol" block that is difficult to find mathematically. Creating these numbers requires such a powerful processing power that it takes too long to insert a fake number in the chain; subsequent blocks with the correct number have been created. This means that the network node can compare a single forged block with many real blocks that appear in the other node's on-chain copy, and quickly agree on which block is true.
The creators of the block, known as "miners," are motivated to do this complex and energy-intensive mathematical work, because when they create a block on the chain, they receive new tokens, which are " Mining out" as a reward for their mining work.
This is how to reach a consensus on the proof of the working system. Miners get cryptographic rewards through sophisticated computer calculations, and the nature of these calculations makes it easy for the entire network to be true and what is not.
However, the proof of the work consensus system is not perfect. The process of building consensus is relatively slow and requires a lot of computing resources. In a sense, the proof of interest is a response to this view. This is a consensus approach designed to provide blockchain networks with the same functionality as proof of work (security consensus) without wasting all the effort or expensive hardware.
Newcomers: POS Consensus
POS is a consensus approach that essentially replaces mining with Token ownership. Toekn holders do not need to perform complex calculations, but instead participate in the creation of blocks by "staking" their tokens, saving them in specific locations without using them (locking bins). Then, the shareholder will receive a reward, which can be a transaction fee or a block reward based on the new token generated by the block created by their share help.
The odds of betting Token holders to get these rewards are usually proportional to the number of Toekn they bet on, so people who bet more Toekn have a higher chance of generating blocks and earn more. The bet requirements help to ensure that the person who generated the block "participates into the game" – the more tokens they have, the more often they get rewards because their ownership reduces the likelihood that they will try to disrupt the network.
However, POS usually includes a random factor that determines who will generate the block, so that a super-rich investor does not necessarily have the opportunity to build the next block on the chain. This is how POS networks reach consensus. Since all of this happens in a certain way – the results are based on known factors such as the number of Staking and the time of the tag – running such a system does not require fancy mining machinery or too much processing power or power The way.
What is Staking?
Staking itself is a unique operation that users can take on a POS network. It usually takes a set of tokens into a bound wallet for a fixed period of time, during which time these tokens cannot be sold. This is part of how the POS system suppresses malicious behavior: any Token store that attempts to compromise the network puts its own Toekn value at risk. Staking is a way for POS network users to participate and support the network.
Running nodes in POS and POW
A node is a network user (usually an individual or group of users selected by other users) who authenticates and stores transactions on the blockchain. The figure above describes how a node runs in POS consistency. The biggest difference between POS and POW appears in steps 3 and 4.
In step 3, the POS system asks the user to perform a staking operation (making their Token temporarily unavailable for other purposes). In contrast, at this stage of the POW, the mining machine will be calculated here.
Then in step 4, the POS selects a validator according to the algorithm already defined in the system (that is, the probability that the stokers with more tokens become the validator is higher), and in the POW system, the miner that correctly performs the complex calculation first generates the block. .
Today's POS certificate
Now that we have a basic understanding of what staking is and how it differs from POW, let's take a look at the current state of the staking economy.
According to Staking Rewards data, the total market value of all POS projects at the time of writing is $19 billion, and the overall shareholding ratio—the number of Tokens currently bet, not sold—is about 30%, which means A total of $6 billion worth of Tokens were bet.
If we assume a return on investment of 10%, the current bet will generate a return of about 600 million US dollars, and the Staking market is still growing rapidly.
The future is of course bright, but before we consider the direction of POS, let us first look at how far POS has gone.
POS does not always exist, and it is not always a pure substitute for POW. Simply put, we can divide the history of POS networks into four different eras:
Hybrid Era (2012) : This era is the first attempt to transform from POW to POS. As one of the earliest POS projects, Peercoin is not a pure POS system. In order to make its initial Toekn distribution more fair, Peercoin has long used the POW consensus. But later, it achieved POS consensus and popularized the concept of "coin era", which is the value used in POS systems, and for some time someone has staked tokens. For example, if both A and B are charged with 10 tokens, but A's tokens are held longer than B, then A is more likely to be rewarded than B.
Pure POS era (2013-2014) : A mature POS system emerged in this era, but it also raised some questions about this new technology. A representative implementation of this phase is NXT Coin, which uses pure POS consensus for initial distribution and all subsequent staking. The NXT coin also abolished the "token era" concept created by Peercoin, without the use of POW.
However, NXT and another popular POS project, Blackcoin (which used some POWs early in its Token release), are not popular. In the meantime, people have also begun to pay attention to a potential problem with POS : "Noting at Stake" . This problem may theoretically occur when the POS project forks. After the fork, the POW miners have a clear incentive to choose a chain, because by dividing their mining power into two parts, they can get half the return on any one network. But the strakers on the POS network will have Tokens on both chains after the fork, so in theory they will be encouraged to continue to support the two chains.
DPOS and POS+BFT Era (2018-2019) : This era has witnessed the rise of EOS and other Entrusted Equity Proof (DPOS) systems. All Toekn holders voted for trusted representatives to operate network nodes, making the network more dispersed. And democracy. Other projects such as Tron and ONT have proposed different implementations of DPOS consensus, including proxy voting and dividend distribution mechanisms.
At the same time, a version of POS with Byzantine Fault Tolerance (BFT) appeared in projects such as Cosmos and IRISnet. After creating a block in which the validator votes on the "true" chain, the variant adds a multi-round voting system . Signing on the wrong chain may be penalized by the system itself, confiscation of a certain percentage of mortgage tokens, which provides a potential solution to the "Noting at Stake" problem that occurred in the previous era.
There are other innovations. For example, Tezos introduces a Liquid Proof of Equity (LPOS), and a Token Holder can delegate a Token to a network node without actually transmitting the Token.
The future of POS consensus (after 2019) : No one can predict the future, but continued interest in POS systems suggests that with the adaptation of old tokens and the emergence of new tokens, POS models will have more innovations and adjustments. .
For example, we may see the creation of a new Token economics by combining the concept of POS staking with local businesses. Systems like this have been built; both Livepeer's transcoding service and Nucypher's privacy passwords require server nodes to tag, and these nodes can be profitable in return.
The POS system and Staking will bring more decentralization and stability to the cryptocurrency. Because the threshold for staking is usually low, there may be more people involved. However, in the POW system, mining requires a large amount of upfront investment, and profitability often means living in areas with lower electricity costs. In addition, POS payments are usually easier to predict, so symbolic investors can get a steady annual return, just like bond profits.
The future of Staking may also be supported by Ethereum, which eventually transitions to POS. Ethereum is the second-largest cryptocurrency in global market capitalization, and its ultimate goal is to transition from POW to POS. Currently, tokens using the POS consensus account for less than 10% of the entire cryptocurrency market, but this number may increase by 10% to 20% this year (through rough estimates), while the ETH transition may produce a larger jump.
Investors should consider five things
At this point, you may be interested in Staking, but investing is still daunting. Different tokens use system changes and different economic rules to produce different token economies. If you want to participate in the investment, here are five aspects of the investment economy, you should study before investing.
Just as the central bank prints banknotes every year, encrypted networks often cast new tokens on a regular basis, which leads to inflation. Not all POS networks have inflation; some POS Tokens are completely pre-excavated. But many newer POS projects are interested in incorporating inflation into their economic models to better reflect the real economy and better reward the symbolic Staking and validators. The inflation or release model for each project varies, so you need to study the specifics of any project you are interested in.
Some projects, such as EOS and Tezos, are issued at a fixed annual interest rate. The current rate of these projects is around 5%, but this number can be adjusted through community governance . There are also projects like Cosmos and Livepeer that adjust the release rate based on the staking ratio. In this case, the proportion of shareholder participation in the bet becomes a parameter of the inflation rate.
Fixed-rate models such as EOS and Tezos are relatively simple, and you can usually find detailed descriptions of these models in the project white paper. However, the models adjusted according to the current staking ratio are different and must be calculated manually. Usually, calculation formulas and models are included in the code for each item, but you still need to check the current staking ratio to be able to calculate the current inflation rate.
2.Staking ratio and rate of return
While the proceeds of token speculators usually come from additional tokens, this does not mean that the inflation rate is equal to the yield. This is because staking is an operation that requires user involvement and self-operation. The corresponding rights belong only to interested parties. This explains why the expanded Token on each blockchain is only distributed to the holder who made the bet.
The exact formula for calculating the return rate of staker is as follows:
Rate of return = inflation rate / all tokens of the bet
For example, Tezos currently has an inflation rate of about 5.5%, while Token holders have a RoR of about 7%. Because only 80% of Token holders participate in the bet, all additional Tokens are awarded to only 80% of the users. Therefore, RoR is 5.5% / 80% = ~7% instead of 5.5%.
Operating a node on a POS system requires computer infrastructure and uptime, so if the Token stored procedure cannot do this on its own, it can delegate its stored Token to a given node. The node will get the return of the block generation and report the return to the bet user proportionally, minus the cost of the server and labor costs.
These costs vary by node operator and network, but at the time of this writing, they tend to be between 5% and 20% of most networks. If you plan to use tokens but don't want to operate your own nodes, you'll need to study the costs you might have to pay and take them into account.
4. Lock-up period
Most POS projects have a lockout period set for the stakers. When a person who has established a token wants to opt out of establishing a token and selling the token in the secondary market, they will have to wait until the lockout period is over before the token can be transferred.
As mentioned earlier, this is to prevent malicious block generators (nodes). A fraudulent block or attack may cause the Token price to plummet, but since the block creator's Token is locked, they cannot sell, so the block creator who inserts the malicious block is actually destroying the value of their Token.
The lock-in period is also useful for reducing overall token circulation and reducing market volatility.
Each project has its own lockout period, usually around 20 days, but you need to find specific information in the project's white paper.
5. Risk factors
Common risks when betting include:
The node you selected is missing a block. If the node cannot generate a block, the reward will be deducted, which will reduce the RoR of the node and the stokers.
When nodes do nothing, run improperly, or operate maliciously, they may be financially penalized. Some POS implementations directly confiscate shares (Tkens) as penalties, called negative incentives, while others set penalties do not reward validators, known as positive incentives (positive motivation is to reward those who follow the rules to get rewards).
The lock-up period of the shares. This is a protection for the chain, but it also means that during this time, you can't sell any bets on the bet to take advantage of the bull market or avoid major losses in the bear market.
Of course, not all of the factors described above apply to every POS Token.
ChainX and WanChain do not currently use the inflation model. Instead, they retained a portion of the original foundry token for betting rewards.
ChainX applies the concepts of “deposit is mining” and “voting is mining” to the distribution of its initial token, and based on the total weight of daily deposits + voting amount for subsequent distribution, the tokens generated by the system every day are divided according to these indicators. Participate in.
For these projects, you don't need to worry about inflation, because inflation in the traditional sense does not exist in these networks.
When in doubt, keep in mind that the core of most POS projects is to establish a positive relationship between Staking revenue and Staking. In other words, the more you gamble, the more rewards you should get.
How to choose the right Staking tool
Now that you have a better understanding of the POS system, you know how to calculate your Staking yield correctly, and you know the risk, the next step is to choose a suitable Staking tool to get your profit.
First, keep in mind that in most networks, tagging or entrusting tokens with specific nodes does not mean that tokens are actually sent to them. In most cases, they will stay in your wallet, although you can't usually spend or transfer money when they are taken. In fact, what you give the node is not the Token, but the "dig" right granted by Token and the initial rights to the profit generated by the activity.
This should alleviate some of the fear of Staking, but the specific mechanism of Staking's work depends on the chain and the Staking tool of your choice. There are two basic ways to build Staking's mechanisms: centralized tools and decentralized tools.
Using a centralized Staking tool is like trading on a centralized exchange. Users deposit their tokens into a centralized organization they trust, and in return they receive a deposit slip issued by the organization.
This gives the organization ownership and authority to these tokens. However, the agreement between the user and the organization stipulates that the organization will provide users with their return yields and eventually return their stored tokens.
It's like trading on a diversified exchange. What the user trusts is not any organization, but the blockchain itself or its code. The user retains ownership of the Token (with public and private keys) and chooses to mine it himself or delegate its mining rights to a third party.
After the token is delegated in this mode, the user still has ownership of his stake. Only the delegate permissions of their Tokens (temporarily) are granted to the node. The revenue generated by the node will then be allocated to the user based on its shareholding size and other chain rules.
The most important thing to remember when choosing between centralized and decentralized is that choosing a centralized tool requires a trust center organization. Instead, the security of the decentralized tool depends on you. If you can keep your keys well, you never need to send your tokens anywhere outside your wallet to take them.
Example of centralized tools
Exchange: Some exchanges offer relatively easy user Staking services. For example, Huobi.com and Gate. Io provides users with access to bets, and Coinbase enables large customers to bet through "cold wallets" and may allow ordinary Token holders to earn bets on their exchanges in the future.
Centralized wallets: Some wallets, such as Cobo and Hashquark, offer users deposit and bet functions, making it easier for wallet owners to make a profit.
The advantage of a centralized wallet or exchange is convenience. As long as users trust the third party they choose, they don't need to learn too much about the Staking process. The risk lies in a less transparent pay distribution; you won't be able to look up the rewards you get on the chain, so you have to accept more or less the description of the rewards you get from your centralized tools.
Example of a decentralized tool
Code (command line): If you have programming skills, the official team for each POS project will usually provide code to make it easy for users to place bets directly on the blockchain. This is highly secure and controllable, but of course it requires the user to be able to write code.
Official wallet and or ledger: POS projects usually develop an official wallet (usually a desktop wallet) for users to store, send and Staking Token. These solutions typically integrate ledgers or other hardware wallets into their systems for added security.
Decentralized wallets: For distributed wallets, there are desktop clients (such as Magum) and mobile clients (such as Trust wallet, imToken, and Wetez). Similar to the official wallet, these scattered wallets support betting on any node in the project. The difference is that these third-party wallets are compatible with multiple projects, and users do not need to switch frequently when betting on different projects. If you are concerned about unreliable security, the safest tool is a cold wallet or a hardware wallet like Ledger.
The advantage of a decentralized tool is that users can save their own tokens, and all operations and reward distributions can be viewed on the chain, making the whole process more transparent and without the need to trust a centralized organization. In addition, users usually have more control and can choose which nodes they prefer to delegate Token permissions to.
How to choose a good validator?
If you choose to perform Staking on the Token but do not operate your own node, you need to delegate the Token's permissions to the validator node. The markup yield is closely related to the delegate provider you choose, so you need to evaluate the following criteria when you look for the Staking validator.
In general, the verifier charges a fee ranging from 5% to 20%. If all other factors are relatively the same, Token holders should compare different commissioning services before they are established and choose the most cost-effective verifier.
In other words, choosing a validator is not always as simple as finding the lowest possible cost, because there are other factors, such as those listed below.
2. Block producer performance (yield)
The performance of the validator as a block generator depends primarily on the uptime of one or more nodes and the switching penalties that the verifier is subject to when they do nothing, run improperly, or execute maliciously. If the node is not performing well, the reward for the spiders will be reduced. If the penalty is executed on the chain, there may be a risk of losing the Token penalty. However, this result is very rare, because even with little attention to node maintenance, this result can usually be avoided.
In the future, there will be a variety of tools to monitor the state of the nodes, some of which already exist, such as bake Bad's auditing tools to monitor Tezos' node performance.
3. Node security and promise clause
No one wants their validator to be attacked and shut down. If this happens, the marked token will not be lost because the Token holder simply delegates the permissions, not the ownership of the token, but the rewards of the attacking node will be reduced. Typically, the official website of each validator will introduce its own security architecture and solutions to prevent attacks.
On these sites, you should look for a promise clause that includes the period in which the validator assigns rewards, the valid terms of the charge, and other details related to the service and security products. It is always important to check these details before selecting a validator.
4. Node's contribution to the community
Staking is not just about profit. By tying the token to the validator, you can select representatives on the blockchain, and each delegate can contribute to the community using his or her own capabilities. Choosing a good verifier team as a validator helps project development, which benefits Token holders and increases the price of Tokens over the long term.
5. Long-term cooperation and credibility
For ordinary stakers, building a long-term relationship with a trusted team is always a good option, which not only reduces the time they spend on elections, but also reduces the likelihood that the team will violate the above promised terms.
So far, we have introduced how to evaluate the token economy, choose the Staking tool, and choose the best validator. But all POS investors should also understand the potential risks of POS networks and how they compare POW-related risks.
POS network security issues
In the more detailed discussion above, we have already mentioned some of these risk factors, but here is a summary of some of the biggest security issues that are often mentioned when discussing POS systems.
The Nothing at Stake
Suppose a node generates two blocks with the same block height to form a fork. In theory, any node with enough Staking will be able to generate blocks to accomplish this task. Although the network preferably has a real chain, in theory other nodes can benefit from this fork because they can double the return by double signing the original chain and the forked chain.
As mentioned above, this is a serious problem in the early days of POS, and there is no corresponding penalty system to prevent this behavior. However, most of the problems of “The Nothing at Stake” have now been resolved by setting a lock-up period and drastic cuts. Although the temporary equity was once the single cost of block production, a certain percentage of the equity must now be locked in the system for a period of time. If the node performs a malicious operation such as double signature, the system will confiscate these Staking, which will first eliminate the economic incentive to perform these malicious acts.
In a ranged attack, the attacker creates a new chain on the genesis block or later, and falsifies part or all of the record in the main chain, hoping to make this new chain of fraud a backbone.
When synchronizing, new nodes and nodes that are offline for a while will not be able to tell which chain is the main chain, because fork starts with the genesis block. And according to the principle that "the longest chain is the main chain", these nodes will automatically select the chain to be replaced to replace the original chain, and subsequent nodes can follow their leader until the network recognizes that the fake chain is true.
This type of attack looks simple because there is almost no cost to generating blocks on the fork chain – only Stake is needed. In addition, it does not take a long time to identify the block as an attacker, so the fake fork chain can quickly exceed the main chain. However, in practice, remote attacks are difficult to implement. The reason for this is technical, beyond the scope of this article, but for anyone interested in the details, there is an extended explanation.
The two issues mentioned above are the two most common security issues in the POS chain. They are not the only potential problem, there are more types, such as Simple attack, Posterior Corruption, Stake Bleeding, Cartel attack, Sybil attack, Grind attack and so on. But so far, these problems have solutions, and these solutions should not be specifically considered on any popular POS network.
Why is POS a good strategy for protecting the network?
A big advantage of blockchain over centralized systems is that it is not centralized. If a central bank's system is attacked, it can be robbed, and a node block chain distributed around the world will not be affected at all when a node is attacked. As long as most nodes are secure, the data on the chain is safe.
For example, in order to destroy a POW network, an attacker needs to control 51% of the nodes on the network, which will cost a lot of money due to the cost of mining. Similarly, in POS, the value of Token maintains security, so an attacker needs to spend a lot of money to acquire a token to achieve that level of control over the network node.
However, POS has long been questioned by POW supporters.
Safety is the biggest area of concern. Often in computer science, we may assume that the more succinct the program or product is, the less vulnerable it is to attack. This is because relatively short, simpler programs should be relatively easy to audit, and defects are easier to spot than large systems with millions of lines of code.
This logic also applies to POS consensus. Although the mathematical calculations required are very complex, the coding involved in creating a POW system is relatively simple. In contrast, code for POS consistency is more complicated because it contains a lot of calculations, such as the number of Stakes, validator elections, reward distribution, and so on. In theory, this may increase the likelihood of an attack.
There is also a psychological aspect: people tend to think that things with higher prices are more valuable. POW mining is expensive both in terms of hardware and power. The POS machine only needs to pay for any fees needed to purchase the initial token. Because of the higher cost of POWs, some POW proponents believe that the cost of attacking POW networks is higher.
A 51% attack on a POW network is costly because the attacker needs enough mining power to control half of the network. A similar attack on the POS requires 51% of all tokens.
At first glance, POS seems cheaper because there is no other cost, but to mine 51% of the POS currency, you have to buy mining machines, warehouse space, air conditioning, electricity, and more. But it's important to remember that in a real encryption economy, buying tokens raises prices. In a 51% attack on the POS system, the attacker needs to purchase a large number of tokens. The more they buy, the higher the price of these tokens. Even if the attack is successful, the return is unlikely to exceed the cost, because when the attacker's buying craze subsides, the symbolic price will fall back to the actual level.
The nature of the POS chain makes it difficult to attack them because:
The community will notice that some addresses purchase a large number of tokens, which can be considered an attack, and the warning is likely to spread before the attack actually begins.
Token prices will continue to rise during the attacker's buying, making the cost of the attack unpredictable.
If the attack is successful, the value of the blockchain itself will drop significantly, causing huge losses to the attacker. The attacker has just spent a large sum of money to purchase 51% of the network token. Any form of interest is unlikely to offset these losses.
The emergence of POS has caused people to pay attention to the inefficiency of the POW system. In POS, with Staking and validator selection, the blockchain can achieve the same security consensus as the POW system, and is more efficient. It also makes it easier for token holders to participate, making it easier for them to enter a high-risk economy.
Of course, the POS project will still face challenges and challenges. As new projects attract public attention, more security issues may surface. But in the long run, more attention may bring better security and stability to the POS system. While centralization and governance are issues that currently plague all consensus mechanisms, POS offers improvements over POW (at least in theory) because the barriers to participating in the network are much lower. This may not be easy, but running a node on a POS is much easier than building a full bitcoin mining operation.
We hope this article will serve as a useful guide to help you prove your stakes and the Staking economy, and now you have a clearer idea of what POS means for the future of blockchain technology.
Author: Jeff Chang Wetez chief operating officer.
Compile: Sharing Finance Neo