How does proof-of-stake work?

Every blockchain relies on a consensus mechanism to validate transactions. Older blockchains, such as Bitcoin, use an energy-hungry proof-of-work consensus, while more recent blockchains, such as Electra Protocol, use an energy-friendly consensus, such as proof-of-stake (PoS).

Proof-of-stake protocols are a class of consensus mechanisms that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. For a blockchain transaction to be recognized, it must be appended to the blockchain. Validators carry out this appending; in most protocols, just like Electra Protocol, the validators receive a reward for doing so. For Electra Protocol to remain secure, it must have a mechanism to prevent a malicious user or group from taking over a majority of validation. PoS accomplishes this by requiring that validators have some quantity of XEP coins, requiring potential attackers to acquire a large fraction of the coins on the blockchain to mount an attack.

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Proof-of-work blockchains, such as Bitcoin, use a validation of computational prowess to verify transactions, requiring a potential attacker to acquire a large fraction of the computational power of the validator network. This incentivizes consuming huge quantities of energy.

Proof-of-stake is tremendously more energy-efficient and is cutting power consumption by 99.95% in contrast to, for example, Bitcoin.

Interesting to note is that proof-of-stake blockchains do not have a maximum coin supply, which means that the supply will rise indefinetely.

Delegated Proof-of-Stake

Some blockchains use a delegated-proof-of-stake (DPoS) system that separates the roles of the stake-holders and validators, by allowing stake-holders to delegate the validation role to a 3rd party node. The upcoming validator nodes of Electra Protocol will by design not use a delegated proof-of-stake system for a number of reasons:

  • Delegates could form cartels: Delegates can organize into cartels by concentrating the role of validation in a smaller number of hands. This not only makes it less decentralized, but it also makes it less resilient.
  • It’s easier to organize instability: Because fewer people are in charge of keeping the network alive, it’s easier to organize a “51 percent” attack.
  • The rich may get richer: People’s vote strength is determined by how many coins they have, which means that people who own more coins will influence the network more than people who own very few.
  • Apathy can kill: Without a large number of engaged users, the system will not function as intended.

Users who want to stake using Electra Protocol use a XEP Desktop Wallet to perform staking. According to the roadmap, also cold staking is planned for Electra Protocol later on.

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