The Proof of Stake consensus mechanism was developed due to the inherent limitations in Proof-of-Work based systems. The general idea behind Proof-of-Stake is allowing users to set aside a number of tokens, called staking, in order to participate in the process of achieving distributed consensus. However, there are different implementations of this system. This report will assess three such implementations namely Cardano, EOS and Qtum.
First generation blockchains are secured by the Proof-of-Work consensus mechanism or 'mining.' While being a secure system for verifying transactions and including them in a new block on the blockchain, Proof-of-Work mining uses an unsustainable amount of energy making it unfeasible in the long term as adoption continues to grow. Bitcoin's annual energy consumption is roughly equivalent to the energy usage of countries such as Switzerland. Proof-of-Stake was introduced with one eye on a future where increased adoption would make the environmental burden of Proof-of-Work mining unbearable. Whereas Proof-of-Work rewards the first miner to solve a complex mathematical problem thereby adding a new block to the blockchain, the creator of a new block in Proof-of-Stake systems is chosen by a voting process where the votes of each node are proportional to that node's stake. Another issue solved by staking is the token velocity problem. A successfully engineered token economy would see the value of the network increase with added network usage. According to the equation of exchange used to value cryptonetworks the network value, denoted by M, is equal to PQ/V where PQ is the size of the economy facilitated by the token and V is the velocity or rate at which the token changes hands. This means that the higher the token velocity, the lower the value of the network and hence the lower the price of the individual token. Staked coins have a velocity close to 0, thus reducing overall network velocity and increasing network value.
Cardano bills itself as the "first blockchain platform to evolve out of a scientific philosophy and a research-first driven approach." At the heart of the ADA project lies the Ouroboros Proof-of-Stake algorithm which is used to determine who will form the next block on the blockchain. In Ouroboros, physical time is divided into epochs and every epoch is divided into slots of approximately 20 seconds in length. Each slot has only one leader and only one block, such that the selected slot leader is responsible for verifying transactions and creating the block. The process of selecting a slot leader involves two elements, a deterministic component where the probability of being selected as slot leader is proportional to the amount staked as well as a random component. This random component is necessary to ensure that an adversary cannot take control of the slot leader selection process. It is achieved by having stakeholders engage in a coin-flipping exercise and combining their result to determine the next slot leader. In order to participate in the staking process, wallets must hold at least 1% of available ADA coins. While in theory, that means that up to 100 stakeholders can participate in the election of a slot leader, practically the supply of ADA ought to be unevenly distributed, leading to concerns about voting centralization. These concerns, amongst others, were raised by Dan Larimer of EOS in his Steem article. Cardano is currently in the 'Shelly' phase of development which sees the introduction of stake pools and delegation, allowing users with < 1% of ADA coins to either join a pool of stakers or delegate another user in their stead.
In an effort to resolving the pitfalls of traditional PoS systems, namely that allowing every wallet that contains coins to participate in the consensus process will inevitably lead to consolidation as certain wallets accumulate a disproportionate share of coin supply, EOS has developed a Delegated Proof-of-Stake algorithm as a means of achieving consensus on the blockchain. A DPoS functions as a digital democracy in which all coinholders vote to elect 20 representatives, each coinholder voting with a weight proportional to their staked amount. A 21st representative is chosen at random from the voting pool. These 21 delegates take turns creating new blocks every 0.5 seconds. In addition, EOS has a 5% annual inflation rate with the stakeholders deciding on how new coins will be distributed across the network. However, there are concerns that concentrating power in the hands of 20 delegates can lead to rigid cartel-like behavior, especially as the barriers to entry for becoming a delegate are quite large. Indeed, Vitalik Buterin raised the economic concerns of vote buying inherent in DPoS systems in a neatly penned article. He imagines a world where delegates bribe their way to votes by promising to share a percentage of the block rewards with voters. This would render the whole process meaningless as the percentage offered as a bribe tends to 100%.
Qtum is a Chinese smart contract platform which hybridize between Bitcoin's UTXO, or unspent transaction output architecture and the Ethereum Virtual Machine. This allows it to run both Bitcoin-specific and Ethereum-specific applications. Previous Proof-of-Stake implementations took into account coin age, the length of time that the coin has been staked, when determining who gets to create a new block. However, this does not incentivize nodes to stay online as they can simply wait offline for the reward to increase. Qtum uses PoS 3.0 which does away with coin age as a variable in the staking lottery. Qtum is mined roughly every 2 minutes, with the probability of a wallet being to mine the block being proportional to the number of Qtum in the wallet. Once a wallet has been chosen to mine a block, it receives 4 Qtum plus transaction fees as a reward and cannot participate in the mining lottery for the next 500 blocks.
In an effort to move away from the energy-intensive PoW systems, PoS is proving to be a popular alternative, particularly amongst smart contract platforms. Even Ethereum ran its PoS-based upgrade, 'Casper', on its testnet at the end of 2017. Aside from being a secure means of achieving distributed consensus across the network, PoS protocols can also function as a cryptographically-secured savings account, paying out rewards in proportion to the coins staked. The future for PoS –based protocols is bright. Time will tell which implementation will gain confidence in the markets.