March 08, 2021 · 4 min read
Cryptocurrencies present a phenomenal opportunity for communities to work together in a mutually beneficial way. Currently, most people use banks to transfer money. In this model, they are the ultimate truth and make these decisions for us. This is a centralized model. Consensus mechanisms, such as proof of stake, allow everyone to be a part of securing the network that they use and benefit from having such responsibility. This is known as a trustless, decentralized system. However, how does this work, and can we trust it to be secure?
Proof of stake is how some cryptocurrencies verify transactions between people. Everyone who owns a ‘stake’ in the network, participates in its security by validating transactions. An individual’s ability to verify is directly proportional to their ‘stake’ in the network.
If I own 10% of the coins, I can verify 10% of the transactions. Now that we have a basic understanding of how proof of stake works, we can discuss the security of it.
Before we can address the security of proof of stake, it’s relevant to understand how it works in relation to proof of work, as it sought to address some of the issues presented by Bitcoin’s consensus mechanism. To understand if POS achieves this, let’s first understand how they differ.
Proof of Stake: Blocks are added and transactions validated by stakers. Stakers are required to allocate collateral in the form of the currency they are securing. If a staker owns 1% of the coins, they are able to validate 1% of transactions.
Proof of Work: Miners solve complex mathematical equations (hashes) and the first to do so is rewarded in the currency they are mining. Mining power is defined by processing power. If a miner has 1% of the processing power, they will solve 1% of the equations.
The 51% attack is the biggest security concern for cryptocurrencies. Theoretically, if someone were able to gain access to either 51% of the computational power (in the case of POW), or own 51% of the coins in the case of POS, then they could act in bad faith, creating fraudulent blocks, double spending, or even revert previous transactions.
Due to the nature of this attack, small chains are also more susceptible.
In both cases, there are ‘attack costs’ for anyone to act against the network. In the case of POW, this is the cost to acquire 51% of the computational resource. In POS, it is the cost of buying over half the coins in existence.
With Proof of Stake, we face reduced issues regarding economies of scale. 10% of the supply of coins will always mean you have 10% of the validation power. However, with security being tied to technological ability (in the case of proof of work), we are more likely to see scaling, due to the affordability and performance of high-cost equipment.
Due to the nature of mining technology, the cost of Kelsey’s investment is not directly proportional to that of Britt’s. Her effect on the network is not 1% of Britt’s, because the mining farm is more efficient.
However, if Kelsey and Britt were to have spent the same amount on a proof-of-stake cryptocurrency, and they both participated in staking, then Kelsey’s effect on the network would have been exactly 1% of Britt’s. This means Proof of stake is financially more resistant to centralization.
These can be direct via the loss of their stake for participating in an attack, or indirect via a loss of net worth due to a reduction in asset value. Both of these penalties make it unprofitable for an attacker to carry out such attacks, as they are self-destructive.
Also, as an extension of the economies of scale, it is more expensive to attack proof of stake currencies than a proof of work one, meaning the inherent economic penalty for attacking the network is greater.
The simple answer is yes, proof of stake is as secure, if not more secure than proof of work. The cost of attacking even a small POS coin is large and would mean huge losses for any malicious actor.
However, there are other types of proof of stake which have drawn criticism. Delegated Proof of Stake (DPOS) is one of these, as people have posited it leads to the same centralization as Proof of Work, as they operate similarly to mining pools.
At the end of the day, a network is made more secure through diversifying stakers and masternode holders. The Divi Project is actively creating a healthy ecosystem through its easy-to-use cryptocurrency features.
That’s the beauty of it. It can be so much easier. And the easier it is for someone to contribute, the safer we all are.
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March 08, 2021 · 4 min read