In a more “Blockchain” context, it refers to the ability of the network to sustain a higher number of occurrences. The raising adoption of cryptocurrencies, and the increase in transactions this entails, has made evident that Proof of Work (PoW) algorithms are having a tough time adapting to mainstream use. In the following article, we will mention some of the scalability benefits that Proof of Stake (PoS) algorithms offer.

Let’s start off by mentioning some of the scalability issues of PoW. Our examples will be mainly based on Bitcoin, but most issues are suffered by all pure PoW projects. One of the constant topics regarding Bitcoin scalability is “the block size debate”. The initial block size of 1 Mb is very small to sustain thousands of transactions. This has caused the slow transaction time that are well known in Bitcoin, and have also occurred with Ethereum. Blocksize increase is not a viable solution because it is temporary, and it would require an increase in size every time the number transactions has doubled. Bigger blocks would also result in centralization. Off-chain scaling is one of the suggested ideas to scale Bitcoin. It involves creating different payment channels that can occur without being registered in the chain. This sounds like a good idea, but it puts in question the actual need for a blockchain if an increasing number of transactions will occur off-chain. An additional issue with off-chain scaling is that it could permit the introduction of hubs which charge fees for operating payment channels. In short, PoW projects trade-off a lot of performance in order to stay decentralized.

Since switching block sizes and creating off-chain payment channels are not solving the problem permanently, different consensus algorithms seem to be the long term solution to substitute these temporary “patches”. Projects based on a Proof of Stake algorithm have tackled many of the scaling issues of PoW by achieving better latency with less computation, bandwidth and storage. Whenever we are discussing consensus algorithms, it is important to always keep in mind the properties of a data structure that one is trying to find. These would be: a) no entity controls the content of the data, b) the database can move forward, c) participants agree on the content of the data. Taking these points into account, let’s see the scaling benefits that PoS entails.

Proof of Stake offers interesting solutions. Amongst the different forms of PoS, the ones based on Consortium consensus that use Byzantine Fault Tolerance (BFT) show some clear scaling solutions. These PoS systems offer consistency as validators are randomly chosen for each round and they end up agreeing whether or not the block becomes part of the chain. Since one of our main objectives when picking up consensus algorithms is to make sure no entity controls the content of the data, spotting non-honest and defective nodes in the network is essential.

In order to guarantee fault tolerance when it comes to non-honest and defective nodes, PoS systems using BTF guarantee speed and consistency because validating nodes need to agree before a block is generated. The fact that a previous agreement is required before the formation of a block permits settlement finality and speeds up transaction settlement time to under 1 second from the current tens of seconds to tens of minutes that are required by PoW algorithms. The lower load on the blockchain also causes energy consumption to decrease dramatically.  Having lower energy consumption and faster transaction times, PoS projects already tackle the main scalability issues that PoW faces.

In conclusion, PoS offers several solutions to the Bitcoin scalability problems. The main issues of speed transaction and energy consumption are tackled by a system that aims to reach a consensus before blocks are formed. This permits the processing of thousands of requests per second with sub millisecond increases in latency. Proof of Stake gives an impression of being more complex since it does not imply resources as clearly as PoW does with its energy requirements. This causes people to question it’s efficiency and future value, but if you dig into the systems and understand them, you will see that scalability is not obtainable with PoW, while it is with PoS.This is one of the many reasons why we are convinced that Proof of Stake is the future. And we, at Pool of Stake, create the first decentralized pool for Proof of Stake coins.

The chosen native blockchain is Qtum, and with this example, you will finally see in practice the simplicity and usability of our upcoming product. In the following article we will refresh your memory on what Pool of Stake is, give a short introduction of Qtum, and finally showcase our MVP on the Qtum testnet.

Let’s start with Pool of Stake. The goal is to create the first pool in which members can stake their Proof of Stake coins together, to create and share greater forging rewards without losing ownership of the coins or relying on third parties for trust. How are we going to do this? It is simple and possible thanks to Smart Contracts. Pool of Stake is a Smart Contract on native Proof of Stake blockchains (in the MVP on the Qtum blockchain). A member deposits his PoS coins to the PSK Smart Contract in exchange for an IOU token that will be deposited back to his or her wallet. All the coins in the PSK Smart Contract will be forging together and producing proportionally more rewards. The only way to retrieve the staked coins is by giving back the IOU- something that only the coin holder can do. The reward will be calculated daily at 23:59:59 CEST and registered in the IOU. Once the member wants to retrieve his initial PoS coins, plus any additional coins generated as rewards, he or she simply sends back the IOU token to the PSK Smart Contract and receives the reward. To make things better, Pool of Stake will have a  token called PSK not to be confused with the PSK Smart Contract) that, depending on the amount held, will increase the forging rewards by reducing withdrawal fees. Now that we’ve cleared that up, let’s move on to Qtum.

Qtum is an open source blockchain project which’s core technology combines a fork of Bitcoin core, an Account Abstraction Layer allowing for multiple Virtual Machines including the Ethereum Virtual Machine (EVM), the use of Smart Contracts and Proof-of-Stake consensus aimed at tackling industry use cases. It additionally implements a Decentralized Governance Protocol (DGP) which enables it to easily scale for the future. Qtum has an edge over competitors like Cardano and EOS because it is already using tried and tested technologies that are proven to work. Qtum aims to develop the “public blockchain for business” by bringing its technology to financial services, supply chain management, social media, gaming, and other industries in the future.

Now, here comes Pool of Stake’s first MVP. You can find the code here:

https://github.com/poolofstake/MVP

After describing our project and Qtum, we will see how they interact. As already explained, Pool of Stake is a Smart Contract on the Qtum blockchain, to which the coin holder will deposit his coins in order to generate rewards. After depositing qtums, the Smart Contract deposits the IOU to the Qtum holder’s wallet. If he or she just wants to withdraw the qtums, he or she just has to send the IOU back to the Smart Contract address and the coins (plus any generated rewards minus the withdrawal fees) will be returned to the Qtum holder’s wallet. Here is how it looks like in images:

Smart Contract Address

https://testnet.qtum.org/address/qMaNLQCp86karfym3KE4FJPFoBF8x4brVE

qtum is deposited to this address

– tokens deposited here start generating forging rewards
– a deposit of qtum to this address will yield an IOU back to the sender’s address
– in MVP the IOUs are QRC 20 tokens called “PQM”

Qtum holder’s wallet

https://testnet.qtum.org/address/qfgjqZKA7XsgXcKLty35wX9H5WgJBzswAR

– this is the qtum holder’s wallet- qtum tokens are sent to the Smart Contract from here
– this wallet receives back the IOU/”PQM” tokens which can be seen in the “Token Tracker” section
– if the coin holder wants to collect his or her rewards, or simply return the qtums to the wallet, he or she just needs to send the PQM back to the Smart Contract, and receive the qtums and any generated rewards

A lot of people can find complications when trying to describe with words an abstract process. In reality, most blockchain applications tend to be a lot simpler than people expect, and examples tend to clear ideas. In this article, we saw the simplicity in which a user can generate rewards while always keeping his qtums safe. To recap, the process just consists of sending the qtums to the Smart Contract, which automatically sends PQM tokens to the wallet. Then, sending the PQM token from the wallet back to the smart contract in order to receive the Qtum and any generated rewards back. Tadaa!

If you find any difficulties, please do not hesitate to contact us and ask for support! We are happy to help!

Initial Coin Offerings (ICOs) have been the sector that has been hit the most by new regulation, and it is still in the crosshairs of important regulating bodies. ICOs have proven to be a great vehicle to raise capital from a big crowd instead of few venture capitalists. Several businesses with good ideas and solid business plans have raised capital through ICOs and developed great products or services. Sadly, several others have failed, or even worse, have scammed investors. The lax regulation and fast flow of capital has made it easy for bad actors to utilize this method to scam investors, but we should not be deterred by this. ICO regulation is starting to develop positively in many countries, and regulation is one of the main things that investors should look at before putting money into a project.

We strongly advise that investors revise the governing law for the project they are considering to invest in, which should always be specified on the whitepaper. Pool of Stake will be governed by the guidelines published by the Swiss Financial Market Supervisory Authority (FINMA). Our investors will benefit from the forward-thinking culture surrounding business, banking, and finance in Switzerland. Pool of Stake will be the first decentralized pool for Proof of Stake blockchains that will let different participants stake their coins together and share rewards without losing coin ownership or relying on third-parties. This innovative project will be governed by the Swiss ICO guidelines that guarantee investors clarity and security. In the following text, we will do an overview of the aforementioned guidelines and explain how they will apply on the PSK token and protect PSK investors.

The increased number of ICOs being planned or executed in Switzerland created a rise in enquiries regarding the applicability of current regulations and led the FINMA to publish new guidelines in February 18, 2018. The high demand for ICOs has urged regulators to provide clarity in what is already a very dynamic market. One of the main perks of FINMA’s decision is that they decided that each case needs to be decided on its individual merits. Given that current regulation is not ICO-specific, FINMA will focus on the function and transferability of tokens.

The key factors to consider are the underlying purpose of the tokens and whether they are already transferable or tradable. FINMA will categorise the tokens into three types: payment tokens, utility tokens, and asset (commonly referred to as security) tokens. Hybrid forms of the previous categories are also possible. Let’s move on to define them.

• Payment tokens: synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time.
• Utility tokens: tokens which are intended to provide digital access to an application or service.
• Asset tokens: these represent assets such as participations in real physical underlyings, companies, earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.
• Hybrid: there can be combined forms of the categories listed above. For example: a utility token that can also be widely used as a means of payment will fall under a hybrid payment/utility classification.

After setting out the classification of tokens, FINMA decided that anti-money laundering and securities regulation are the most relevant to ICOs. The Anti-Money Laundering Act (AMLA) establishes several requirements for financial intermediaries, like establishing the identity of beneficial owners. Money laundering risks are high in a decentralized blockchain-based system since assets can be transferred anonymously and without any regulated intermediaries. On the other hand, securities regulation intends to create a safe environment that ensures that investors have a minimum set of reliable information; and that trading is fair, reliable, and price-efficient. Lets now describe how these two sets of law apply on the different kinds of tokens that we described previously. Please keep in mind that hybrid tokens will be subject to two or more sets of law.

• Payment tokens: FINMA will require compliance with the anti-money regulations, and will not treat such tokens as securities.
• Utility tokens: these tokens will not be classified as securities if they only serve the purpose of conferring digital access rights to an application or service. If this utility token has a partial or full function as an investment in economic terms, FINMA will treat the tokens as securities.
• Asset tokens: these tokens will be regarded by FINMA as securities, and will have to go through all the requirements established by the securities law and the Swiss Code of Obligations.

As it can be noted, Swiss regulation is forward thinking. It aims to guarantee the safety of investors while allowing legitimate innovators to navigate the current regulatory landscape and launch their projects in a law abiding and integral way. The PSK token will fall into the utility category, because it confers discount rights for the PSK platform. The PSK token serves a specific purpose. It will permit holders to retrieve a higher reward when staking a Proof of Stake coin. The Utility nature of the PSK token causes it to not be considered a security because of the following points:

• PSK token is not a security since the contributor has no rights attached to the PSK token, outside of participation access provided by ownership of the PSK token and the discounts it provides to holders
• PSK is not an investment product.
• The token is not a company share stock/derivative.
• The tokens may be listed on various secondary exchanges, this is incidental and non-consequential to the primary purpose of the token as an utility.

In conclusion, PSK is just a Utility token. It will not fall under the category of an asset, thus, securities law will not be applicable. It is also not a payment token, which exempts it from the Anti-Money Laundering Act. Investors will be able to enjoy the flexibility of not falling under the current securities regulation, and yet still have the security provided by AMLA. In short, investors can count on the historically proven reliability and security that Swiss regulation offers, while not being burdened by excessive regulation.

Governance structures

In addition to hardware requirements both PoW and PoS, intentionally or not, have implemented certain governance structures in their protocols which affect the value of stakeholder’s investment (hardware and time). Whereas Governance is generally less clearly defined in PoW chains, many upcoming PoS chains articulate their Governance structure in a clearly defined way. As has been argued by many prominent figures in the blockchain space, governance in blockchain is the perspective from which to approach many of the problems blockchains are facing today.

Governance structures in PoW

To kick off discussion of the governance structure in the most prominent PoW blockchain Bitcoin, let us first look at the early days of Bitcoin. Bitcoin was born out of a general skepticism of formally established governance institutions. Instead of trusting in legally defined governance mechanisms, code is meant to regulate relations of power and claims.

However, as the history of Bitcoin has shown, the direction into which Bitcoin evolves is anything but clearly defined by code. Many of Bitcoin’s stakeholders hold fundamentally opposing convictions of where the protocol is meant to stand in terms of degree of centralization and transaction speed. As the protocol scales, many of these disagreements over Bitcoin only will intensify as the recent block size debate has shown.

In the Bitcoin protocol as it exists today there are many stakeholders, but the most influential in the development of the protocols are developers, miners, exchanges and users. This article focuses on all of them to clearly articulate what relative governance role is assigned to miners. What power do miners have to press their claims on the blockchain and how does their influence broadly compare with other stakeholders.

To begin with, developers derive their sphere of influence from the power they have to implement in code the rules set by the 2008 Bitcoin whitepaper. As such they maintain the code and write new functionalities when demanded by the community. However, their sphere of influence is not endless and limited for two important reasons. First, Bitcoin is an “open” protocol, meaning that there are no gatekeepers to participation in the community. Every change implemented by developers can be scrutinized by other developers. There is no way that a critical software update would go about unnoticed. Second, implementation of the developer’s update still depends crucially on acceptance by the wider community. If the update gets ignored by users, miners and exchanges, then the developer will have no real influence on protocol development.

Miners hold a significant influence over protocol development as they are the one’s that verify new transactions on the network and thus mine new tokens. If the miners decide to not accept an update proposed by the miners and refuse to download new software, then propositions by developers are effectively useless.

Centrally controlled exchanges like coinbase and bitfinex are still one of the main platforms through which new users are exposed to tokens. Consequently, if an exchange does not list for example a hard-forked alternative to a token like for example Bitcoin Cash, then many potential users will never be exposed to the token. Lastly, users can reject updates and forks of a blockchain by simply switching to a different protocol.

In total, miners have a relatively high influence to press their claims on the blockchain. If they decide to refrain from updating to a new software, then nothing will change.

Governance structures in PoS

To begin with, the stakeholder set of PoS chains includes all of the above stakeholders with the exception of miners. Instead we rely on so called forgers who forge a block as already outlined in part one of this series.

PoS does not rely on specific hardware which means that PoS can incorporate a more flexible set of governance rules. In turn there already are a myriad of different governance mechanisms proposed through different PoS projects. Many ideas creatively tackle some of the difficulties encountered in traditional blockchain governance. Now, what does this mean for forgers?

First, forgers by definition will hold native token to enter the privilege of adding new blocks. In this sense, they are affected by how the protocol evolves over time through governance. So how well other stakeholders do their job under governance will affect the holdings of the forgers.

As with any other blockchain, PoS relies on developer updates to constantly evolve. One of the main problems with existing blockchains is that there is little incentive to maintain a blockchain or work on core development features. While there is collective interest in the sustainable scaling of blockchains, developers’ time is typically spent in a more lucrative way by launching their own token or networks. The Ethereum foundation has already tried to counter this trend by handing out bounties for the completion of useful applications on the Ethereum chain. However, there is no systematic way to incentivize people to build on an already existing chain instead of forming their ows n chains. A governance mechanism on PoS chains which has repeatedly been suggested is to attach a bounty to an improvement proposal. If an improvement proposal gets added to the protocol, then the person who proposed it in the first place gets paid by the network. This way developers are incentivized to work on ideas which update and scale the protocol. This governance mechanism is to the benefit of forgers as it creates value for the protocol which translates into a higher token price.

More directly, governance may empower forgers to change protocol in very well defined ways.

With Proof of Stake we can also create systems where users have the ability to participate more actively in governance decisions. Simply by virtue of having a certain token, people are authorized to participate in certain governance decisions like the block size debate. If considered important then token holders (forgers) could also be asked to vote on updates to different consensus algorithms. The flexibility of PoS allows for a range of governance decisions to be taken by forgers.

One limiting factor to this development is, however, that most token holders in practice never make use of their voting rights. Informing oneself on the different options and making good decisions involves costs. To lower these costs some protocols have considered delegated voting for their protocols. People can chose who they want to delegate their voting rights to and let them take care of difficult choices on their behalf.

Pool of Stake offers a more holistic solution to this problem by taking care of important governance decisions while letting the user remain in control of the token. Users can simply pool their token in one place and have peace of mind when it comes to the future of their assets.

In Proof of Work (PoW) miners on the network are essential to verifying transactions and keeping the shared ledger up to date. So-called forgers have a similar function in Proof of Stake (PoS) protocols. In this series of two posts we outline the main differences between miners and forgers in a blockchain protocol. The first post will outline hardware requirements for validators in both PoW and PoS chains. In a second post we will discuss the main governance rules affecting forgers in PoS and miners in PoW.

Hardware requirements

The hardware requirements to become a validator on PoW chains and PoS chains vary greatly. It is fairly difficult for validators on a protocol to circumvent specific hardware requirements and so the hardware requirements can be regarded as the minimum investment validators need to make in order to validate blocks on the protocol.

Hardware requirements in Proof of Work

To become a miner on the Bitcoin network, the people who operate nodes need to acquire expensive hardware. Basically, there are two options for hardware to mine Bitcoin. Whereas ASICs (Application-Specific Integrated Circuits) are more efficient than GPUs (Graphics Processing Units), they can only be used to mine a singular coin. GPUs can be regarded as calculators for anything and if you so decide they can be used to mine a different coin such as ZCash or Dash.

In this sense, using an ASIC will compel the miner to stay on the network. The binding of the hardware to the specific network entails that miners have skin in the game. If the network loses value, then they also stand to lose a significant share of value. The value of their hardware is tied to the success of the network. With a GPU mining hardware the miner can exit flexibly once the value of the token drops. GPU Mining gives the miners more leverage in governance discussions as they can more easily switch protocols when their proposals are not passed.

Given the economies of scale on the Bitcoin protocol as discussed in a previous post individual miners often pool their resources for better outcomes. Rewards in the pool fall into two categories. First, miners may be rewarded proportional to their hardware contribution every time a block is found. This leaves individual miners with the risk of variance, i.e a block may not be found for a long time. The other reward mechanism is pay-per-share where the individual miners gets a reward for every piece of hardware they submit. This leaves the individual miner with no risk of variance, because they get compensated regardless of whether a block is found or not.

One of the problems of proportional pools is that dishonest individual miners may switch from proportional to pay-per-share once the proportional pool has lost its profitability. From the perspective of the individual miner this may be profitable, but it undermines the long-term trust that can be put in proportional pools.

Hardware requirements in Proof of Stake

In comparison to PoW protocols, the hardware requirements to participation on a PoS protocol are relatively low. Instead of specific hardware components stakers need to only have tokens to participate as well as certain minimum hardware requirements. Depending on how many tokens they stake they are chosen as next validators on the chain. Hardware required for staking is an 24/7 online connection on a running server and sufficient RAM space. In this post we have made an overview of pains and gains with PoS forging.

Theoretically, PoS enables wider participation in the validation of transactions. This is connected to the fact that validators no longer have to rely on expensive hardware requirements in the form of ASICs and GPUs. However, one of the considerable limitations of PoS is that a constant network connection is required for staking. Given these minimal hardware requirements there are two negative consequences for individual stakers. First, because of rising profit margins for bigger stakers, centralization is likely to occur as smaller stakers are pushed out of the market by bigger stakers.

Second, most individuals will not be able to provide a constant online connection for staking or sufficient RAM space to run all clients of their PoS coins. As a consequence they will miss out on rewards for validation, which leads to even more centralization. To counter this development some projects have implemented so-called delegated PoS (provide link to our previous article) which lets smaller token holders delegate their tokens to a bigger token holder so that they can stake on behalf of the smaller token holders. This way the smaller token holder can cash in rewards while not having to worry about constant network uptime. Another idea is to delegate PoS tokens to a staking pool which takes care of the staking even in chains were delegated PoS is not an option. Pool of Stake is such an option which allows token holders to remain in control of their tokens while staking on their behalf. This way smaller stakers can avoid the requirement of a constant network connection for staking and reap the full benefits nevertheless.

The future of hardware requirements for Proof of Stake

By now it should be clear to the community that Proof of Work in its main implementation has led to an undesirable state where small participants are seriously excluded from the validation of new blocks. As a function of significant hardware requirements PoW seems incapable of adapting in such a way that it could reestablish widespread participation in validation. The lower dependency on hardware makes PoS more flexible when it comes to building protocols that create a sustainably decentralized community of validators. Despite significant improvements over the centralized PoW protocols, we still believe that there are aspects of PoS protocols that could lead to centralization in the long term and therefore the exclusion of smaller validators. Pool of Stake is building a decentralized staking pool for smaller PoS coin holders to unite and to create together the greatest rewards possible.

Here at Pool of Stake, we believe that outstanding projects cannot be developed in a closed and inward looking fashion. Maveric will ensure that our Smart Contracts will be temper-proof and secure! That’s why we are actively creating partnerships that can help us reach the goal of creating the first truly decentralized and secure pool to stake Proof of Stake coins.

Maveric SA is an innovative Blockchain advisory firm based in Switzerland,
supporting Distributed Ledger Technology companies in fields like project implementation, IT &
Blockchain development, legal advisory, and even marketing and communication.

The first quarter of 2018 has been challenging for Blockchain companies, especially for the
ones launching ICOs. The uncertainty caused by the debate on regulation has taken a toll on the
market. Nonetheless, there is bright hope. South Korea, once the most active crypto market, is
looking to reverse its ban on ICOs. China’s ban on ICOs is being easily bypassed and will probably
make the government reconsider its ban on new coin offerings. On other parts of the world, like the
European Union and the US, regulation seems to be taking a positive form.

However, the regulatory environment of ICOs is yet to be defined. Fortunately, Pool of
Stake will be able to rely on Maveric’s expertise in regulation and compliance. We are looking
forward to navigate together the turbulent waters of current regulation that markets are facing. We
are happy to be able to rely on Maveric SA. Our partnership will help us review our project in an
objective manner, implementing the best practices in the industry and the necessary regulatory
compliance to give our project and our investors the security they deserve.

Smart Contracts lie at the heart of Proof of Stake. If blockchain gives trustworthy data security, then smart contracts give trustworthy and automated code execution between two parties without a central coordinator.

Security

Smart Contracts are encoded on the blockchain. Thereby they provide the same level of data security as blockchains.

Transparency

Smart Contracts are openly visible on the blockchain meaning that anyone can check the correctness of previously agreed rules.

Decentralized Control

Because Smart Contracts run on a blockchain, there is no single source of control. Anyone can constantly check the updates to the blockchain and if anything is changed on the previously agreed rules of the Smart Contract, other participants on the network will reject this update.

Immutability

Once a Smart Contract is on the network, it is on the network. Due to the previously discussed characteristics, it is close to impossible to change pre-agreed Smart Contract rules.  

What are Smart Contracts? VIDEO

How does Pool of Stake use Smart Contracts?

Pool of Stake runs exclusively on Smart Contracts which makes it a fully decentralized pool. Pool of Stake runs on Smart Contracts embedded in all participating PoS blockchains (e.g. Qtum, BOScoin).

Smart Contracts have 3 main functions on PSK:

Create a decentralized network weight on the native blockchain in order to forge

Make automatic transactions of staked PoS coins and IOU tokens which can be triggered only by the user (e.g. for initial PoS deposit or for the withdrawal)

Automatically transfer IOU tokens into the user’s wallet for newly generated rewards

One big challenge to Smart Contract security are bugs! The cryptoworld has wittnessed spectacular hacks due to a bug in a Smart Contract, e.g. the DAO hack. This shows how immensely important Smart Contract audits by professional third party auditors is. Swiss Financial Market Supervisory Authority FINMA included Smart Contract auditing as a legal requirement for blockchain companies registered in Switzerland. Since Pool of Stake is a Swiss-based company we cooperate with Maveric SA for all our Smart Contract audits in order to be fully complient with the Swiss law and provide maximum security for our users.

What does this imply?

The PSK team cannot alter Smart Contract rules

This means that PSK is a zero trust pool Smart Contracts are distributed on the entire network, which means that it is fully decentralized

In this post we will outline the main Proof of Stake (PoS) instantiations and corresponding projects. Sometimes PoS is being used as an umbrella term for a variation of consensus algorithms. So, what is Proof of Stake? The idea of a stake based consensus algorithm is an alternative to the inefficient Proof of Work that has been around for a long time. Proof of Stake (PoS) was first introduced in an academic paper by Sunny King and Scott Nadal in 2012 and from the start was devised as an alternative to the wasteful Bitcoin protocol. Since then there have been a number of different variations of the consensus algorithm. Just like PoW, alternative consensus algorithms come with several problems which lead to adapted versions of the original protocol.

Overall, the list of PoS algorithms falls into two main categories: chain-based and Byzantine Fault Tolerant (BFT). In chain-based PoS validators are selected pseudo-randomly to create the next block. In BFT the act of suggesting the next block and creating the next block are seperated. So validators that suggest the next block are selected randomly. Then a multi-round voting mechanism determines which block gets finally added to the chain. Unlike chain-based Proof of Stake, BFT consensus does not depend on the length or size of the chain after it. Consensus on a block can come from within that same block. It is important to keep in mind that with PoS design, choices can vary greatly and that a black-and-white division of consensus algorithms is sometimes not possible because a project may be to a large extent PoS-based but have some elements of BFT (e.g. Casper or Neo).

The first generation of chain-based PoS tokens

As a response to the PoW protocol in 2012 Sunny King and Scott Nadal started a more ecologically sustainable cryptocurrency called Peercoin. Sharing much of the source code and technical implementation with Bitcoin, Peercoin differs fundamentally in the way new coins are generated. Peercoin uses a hybrid PoS/PoW system, meaning that some of the coins are created based on the holdings of individuals. Per year there will be a 1% increase in tokens for the peercoin holders. The problem with Peercoin is that it fails to give incentives to token holders to decisively opt for a single chain. Instead they can break security by voting for multiple conflicting blocks without incurring any cost to do so. This is the so-called “nothing at stake problem”. In Proof of Work mining on several blocks is prevented by the fact that a miner must split up and waste their resources to do so.

Second generation chain-based PoS: Ethereum Proof of Stake Casper FFG

Even though Ethereum currently runs on a PoW consensus algorithm, the long term strategy of the project is to transition from PoW to PoS under the name of Casper. The first version of Casper, the Friendly-Finality-Gadget (FFG) will take on the form of a hybrid PoW/ PoS system. Centrally, Casper tries to address the “nothing at stake” problem in the proof of stake consensus algorithm as described in the previous paragraph. The main problem with Peercoin is that there are only rewards for producing blocks, but no penalties. Not being penalized for signing all blocks, the token holder can simply sign every fork on the chain. This includes malicious forks which intend to reverse valid transactions. This way the person who stakes gets the reward no matter which fork wins. Casper works against this tendency of forgers to stake on all forks by penalizing actors that do so. If a validator signs on two conflicting block headers, their stake will be completely or partially slashed.

The initial version of Casper which will be a hybrid of PoW and PoS will be rolled out by the end of 2018.

Some PoS projects: Peercoin, Qtum, Ethereum

Delegated Proof of Stake

A key design difference is whether systems allow token holders to delegate their rights to other participants who can then stake tokens on behalf of smaller tokens holders. Chain-based delegated Proof of Stake (DPoS) was proposed as a solution to incentivize small token holders to continue to participate in the system and remove the burden of having to run and secure a highly available validating node. As we discussed in the blog post on centralization, due to higher profit margins for big token holders, centralization on the blockchain may occur. To enable pooling within the protocol, in DPoS users are encouraged to delegate their tokens to bigger stake holders. As a reward they get part of the staking reward from the protocol.

Some DPoS projects: Ark, Lisk, Waves, Tezos, BOScoin

BFT Proof of Stake

In order to understand BFT, it is important to know which problem it is solving: the Byzantines Generals Problem. Hereby BFT algorithms are able to achieve consensus even if 1/3 (<=33%) validators go offline or become adversarial. However, this implies that ⅔ of the network are honest. Because consensus does not depend on the length of the previous chain, but will be achieved in every single round of validating a block. Furthermore, because BFT consensus algorithms favor consistency of nodes over availability, they can manage with non-synchronous network models. Chain- based proof of stake algorithms on the contrary rely on the synchronicity of the network. There are sub-variations of BFT called modified BFT which is less researched than classical BFT. BFT algorithms can have additionally a delegated voting mechanisms built on top, which gives them a touch of DPoS.

Some BFT projects: Tendermint, Cardano (both with DPoS mechanisms)

Modified BFT: Ripple, Stellar

We hope that now the confusion about PoS fades away and is replaced by curiosity to find out more about PoS in all its variations. If you want to find out more about reward systems and forging, then read our other post on the profitability of coins to forge. Given the plurality and diversity of future Proof of Stake coins, a pool for staking is a convenient place to store and manage assets. With Pool of Stake, users can pool their different PoS coins to get maximum convenience and reward.

The most profitable Proof of Stake coins to Forge

If you are starting to read this, I assume you have an understanding of what forging is, what PoS entails, and how its reward system works. After becoming familiar with those topics, you will see that generating a passive income with cryptos is easier than you think, but also that the research is time consuming. We have prepared for you an overview of the most profitable Proof of Stake coins to forge so that you get a first impression of how your passive income could look like.

So, now that you caught up, you’ve learned that you can earn a reward by staking PoS coins and verifying transactions (the equivalent of Mining on first generation Blockchains, like Bitcoin). As good as it might sound, Proof of Stake Blockchains and forging still face some major disadvantages. Amongst these, you have probably heard that in most cases you need to have a minimum amount of coins to start forging, that you usually have to stay online 24/7 in order to receive rewards, that sometimes you need to wait for your coins to age and your client to sync, and amongst other difficulties, your client will have to sync again to the blockchain every time you lose internet connection. We will address a solution to all these issues at the end of the article, but first, let‘s find out which are the most profitable coins to forge. The coins we will be dealing with are NEO, PIVX, NAV Coin, Reddcoin, OKcash, and Hawala Today. Let’s get started!

NEO

NEO is China’s first open-source blockchain. It is a smart contracts ecosystem that allows users to automate the storage and exchange of digital assets. The NEO blockchain includes an additional token called GAS, which is the reward paid for staking.

Pros:

• A very charming detail is that you do not need to keep your staking wallet open all the time like in other Proof of Stake blockchains.
• Separate reward token (GAS) creates trading opportunities.
• There is no minimum amount needed to start Forging.

Cons:

• Lowest yield on our list.
• Tracking an additional token adds complexity.

Annual yield on investing 1 ETH = 3.59%

Average RAM used in Forging = 1.2 Gb

Reward calculator: https://neotogas.com/?p=profit

PIVX

This is a community-centric cryptocurrency with a special focus on privacy. It is the first Proof of Stake coin with the zerocoin protocol. When it comes to privacy-focused digital currency, PIVX stands out as the second one with the shortest transaction time. There are two ways to get rewarded for forging on PIVX. One is normal staking, which has 1 PIVX as entry requirement; the other one is running a masternode, which requires having 10,000 PIVXs. Doing normal staking will have an approximate yearly return of 4.8%, while running a masternode will yield around 5% annually.

Pros:

• Outstanding transaction speed.
• Users with smaller stakes get the chance to forge.

Cons:

• Running a masternode is expensive.
• Low masternode yield compared to the staking yield makes running masternodes unattractive.

Annual yield on investing 1 ETH = 4.8%

Average RAM used in Forging = 1 Gb

Reward Calculator: http://pivx.cryptonode.co

NAV Coin

This project also focuses on privacy and anonymity, but adds a focus on simplicity of use. NAV coin has the shortest transaction time, beating PIVX by 30 seconds on Block Time. It requires you to run the NAV Coin Core client in order to forge, but alternatively, you can use a Raspberry Pi to save some energy. NAV Coin has a fixed 5% annual return on forging.

Pros:

• Exceptional transaction times.
• Focus on simplicity makes the NAV Coin Core accessible.
• New Valance application will offer a suitable method to present smart contracts.

Cons:

• Confusing staking terms and categories take points from ease of use.
• Low adoption and Market Cap compared to other privacy oriented cryptos.

Annual yield on investing 1 ETH = 5%

Average RAM used in Forging = 1 Gb

Reward Calculator: https://navtechservers.com/navtech-tools/staking-calculator/

OKcash

OKcash started as a Proof of Work blockchain but eventually changed to a full Proof of Stake project. Its focus is on speed and low fees. Their mission is to become internet cash. It offers some interesting additional features, like encrypted messaging, optional anonymous tokens, and plans a release focused for the upcoming IoT code named ROKOS. Okcash used to give an amazing 20% yearly reward. Unfortunately, it gets periodically halved. We just missed the chance to get 10% annually since rewards halved on the 7th of March, 2018 to 5%.

Pros:

• Focus on social economic interactions facilitates fast payments.
• Additional features, like the chat, foment more use.

Cons:

• The block reward has been halved twice, considerably lowering rewards. We no longer have 20% and 10% annual returns.
• No reliable reward calculators!

Annual yield on investing 1 ETH = 5%

Average RAM used in Forging = 600 Mb

Reward Calculator: https://okcashblockhalf.com/

Reddcoin

This project aims to tokenize the social network industry. It’s objective is to create a tipping system in which all kinds of participants in social networks can pay each other for any given interaction. This can include influencers, companies, publicists, etc. The project developed Proof of Stake Velocity (PoSV), which creates a decreasing slope on the coin age accumulation, compared to the linear slope of normal Proof of Stake coin ageing.

Pros:

• Coin ageing time decays, daily rewards are visible.
• PoSV gives incentives for more active network participation.
• Higher than average annual returns.

Cons:

• Not very user friendly, there are several complaints regarding usability, and complex procedures to tip.
• Downloading the whole Blockchain to stake is very time consuming.

Annual yield on investing 1 ETH = 6.18%

Average RAM used in Forging = 800 Mb

Reward Calculator: http://jsfiddle.net/yE6Vp/8/

Hawala.Today

Hawala.Today is an interesting project aiming to create a P2P crypto to fiat exchange allowing safe and near-instant currency swaps anywhere in the world. The project is using an incentive model that they call Incentive for Stake (IFS). Hereby stake rewards and token supply are being inversely related, guaranteeing a 7% yield when maximum supply is met. It is a relatively new token, so the easiest way to acquire it is by using Metamask.

Pros:

• Highest staking reward on our list.
• IFS incentivates adoption and transaction verification
• It aims to become the most practical way to exchange Cryptos to Fiat.
• Wallet can be offline and still Stake.

Cons:

• Staking wallet is in Beta, the project is not mature yet.
• Possible regulatory restrictions in the future due to diligence and tax issues that can arise from their model.

Annual yield on investing 1 ETH = 15%

Average RAM used in Forging = Unavailable

Reward Calculator: https://www.hawala.today/blog/staking_guide/

PSK, stop investing so much time on research and start forging

Now that we have the data on the rewards we can get by forging, the next step would be how to get the coins, and which client or wallet to use in order to receive the rewards. This is time intensive. To put it into context, it would take a few days to do the research necessary to find the best yielding coins. After doing this, you would then have to install the wallets in order to start staking. Each staking client is different, and a lot of them are not very user friendly. Some coins might even make you desist just because of the impracticality of the wallet. After that, you have to wait even more. Your wallet needs to sync to the blockchain. Then your coins need to age, which consequently, can take ages. After all this, you can start staking, but… imagine your cat accidentally disconnected your router and you lost internet connection. Now you have to sync your wallet again, and in some cases wait for your coins to age again. It gets even more annoying. In some cases, if you don’t separate your staked coins before doing a transaction, all your staked coins can lose their maturity. The point is clear, forging with many coins consumes too much time. You probably also noted that we included “Average RAM used in Forging”. This is the RAM that the client will use while forging. With 1 GB being more or less the average, you are looking to waste a lot of your computing power while staking. If you plan on running two or more different clients, your CPU usage can easily be 100%.

Fortunately, Pool of Stake (PSK) is working on a solution. PSK’s main goal is to create a forging pool, secure by ERC20 standards, where PoS coin holders will be able to stake together on a given Proof of Stake blockchain in order to raise their forging rewards. This lowers entry requirements for forging and secures decentralization. PSK also plans on saving research time and increasing revenue through the Smart i.o. Database and platform. The platform will provide an analytics platform that tracks the performance of the different PoS coins. PSK users will be able to track which coin generated the most rewards on a daily, weekly, and yearly basis. PSK users do not have to trust the calculators of the native Proof of Stake blockchains about the proportion of their reward but can check for themselves through the block explorer function of the PSK platform. The platform will save users time and help them maximize their forging profits. No more eternities spent on researching yields, installing wallets, learning to run nodes, or even protecting your internet connection!

Note: Yields and additional numerical data here presented were obtained either on the reward calculator links here shown or on the token’s official website, at the time of writing this article.

In our last post the main problems of the Proof of Work (PoW) consensus algorithm were discussed. The alternative consensus algorithm Proof of Stake (PoS) was touted as the solution to exorbitant energy inefficiencies and centralization tendencies. In this post we will explore PoS in more detail and discuss potential problems of the protocol. Assuming readers are familiar with PoW deficiencies, we can go on to discuss PoS characteristics. Contrary to the Bitcoin PoW, there is no planned token mining in the main Proof of Stake projects. Instead of mining tokens, users are expected to forge blocks. The frequency with which forgers get to forge a block depends on the token value staked or in other words locked up. Once their tokens are locked, forgers are called to bet on a block and thus participate in the verification of transactions.

Reliance on Hardware

To begin with, given that PoS does not rely on mining hardware for heavy computation, PoS protocols are a lot more flexible in their mechanism design. Whereas in PoW, mining hardware will not get affected by the protocol no matter what the behavior of the node, Proof of Stake can be designed in such a way that tokens can be slashed given certain conditions. In PoW, if the participating node gets banned from the network, then they can still sell the hardware to another person or legal entity. They may also redirect their computational power to another protocol such as Ethereum or Verge.

Governance flexibility in Proof of Stake

Another governance flexibility that comes with the transition from PoW to PoS is that centralization due to economics of scale can creatively be countered. As we argued in our last post, it is economically more rewarding for small miners to organize in gigantic mining pools and give up control over their tokens. This encourages centralization of the network. In Proof of Stake, rules of governance can be created such that centralization is discouraged. This is enabled by a higher degree of independence on hardware in PoS systems. For this reason Proof of Stake has often been judged as the consensus algorithm less likely to lead to the centralization of the network. Centralization of miners in the Bitcoin mining network. https://blockchain.info/de/pools retrieved 18.01.2018 Centralization of miners in the Bitcoin mining network However, depending on the characteristic of a PoS algorithm, Proof of Stake may also lead to a centralized blockchain ecosystem. A centralized blockchain ecosystem is one where control of the network rests with a single or few participants instead of being distributed across the network.

The Monopoly effect

Forgers on the PoS blockchain typically receive rewards proportional to their staked value. This means that already quite influential participants on the blockchain will become even more influential over time. Because each token has the same chance of being picked as the next validator, the odds to get chosen as the next validator rises with the amount of token one holds. Whereas PoW works to the benefit of those with the most hashing power, PoS designs the game in favor of those with the most tokens available for staking. Just like Bitcoin mining adheres to the principle of economies of scale, in Proof of Stake the profit margins of high stakers are significantly higher. Regardless of the amount of tokens staked, the wallets of participants have to be online. To be online, participants need resources including hardware, electricity, and an internet connection. In a way, there are fixed costs associated with forging blocks on a PoS consensus algorithm. Consequently, the forger who stake 1 ETH and the forger who stakes 3 ETH both have to pay the same amount of fixed cost to stake. This entails that the higher the stake of the forger the higher their profit margins. Additionally, the staking algorithm will reward those that are most active on the protocol. One might find this a desirable property of the blockchain, because it encourages participation, but a similarly unequal distribution of influence and wealth may result as in PoW. If participation is rewarded in token and more token creates disproportionate opportunity to influence the system, then unequal influence over the system may arise in Proof of Stake blockchains by default. Without a correction in the protocol a larger ETH stakeholder will grow their stake faster than a small ETH stakeholder. After some time the relative cost for some forgers to stay in the network will be too high and they will be forced off the network.

Pool of Stake solutions

So is centralization on Proof of Stake blockchains a problem that is impossible to avoid? At the beginning it was stated that one of the main benefits of PoS blockchains is the flexibility due to their reliance on code instead of hardware. So one possible way to deter centralization on a PoS blockchain is to program the blockchain in such a way that it encourages staking by small token holders. In such a model the returns to staked tokens would diminish with increasing stake. What could happen as a result are so-called Sybil attacks on the blockchain, namely the creation of many small forging identities by one person or legal entity. This way, centralized control over the network could resurface. Whether or not such Sybil attacks will be feasible depends on how efficiently identity will be verified on blockchains in the future. Preventing Sybil attacks will be vital to the goal of establishing decentralized PoS systems.

Introducing Pool of Stake

Another approach to guarantee the decentralized nature of Proof of Stake consensus algorithms is that smaller stake owners pool their stakes to lower their fixed costs on hardware, electricity and internet connection. The pooling of stakes, however, creates a vulnerability outside regulation and more importantly hacking. As a consequence, the creation of safe pools for staking tokens will become vital for enabling smaller stake holders to participate in the forging process. For this it will be vital to enable ultimate control over the tokens by the small token stakers, because handing over control of the tokens to the pool would mean further centralization. At Pool of Stake we build a staking pool which leaves ultimate control over the tokens with the small token owner. Stay tuned for our coming articles where we will reveal more of our pooling design such that small forgers may benefit from upcoming developments in the blockchain ecosystem.

How does a blockchain decide?

The central appeal of blockchain technology is its decentralized architecture. Instead of having a central authority decide on a given state of a shared ledger, participating nodes must agree on a single state of the world. Does Alice still own 5 Bitcoin or has she spent a few on her shiny new car? In a centralized ledger, a bank has this information tied to its servers und updates the ledger in a centrally controlled manner.

In blockchain the mechanism by which a ledger gets updated is a so-called consensus algorithm. The consensus algorithm of a blockchain network determines a given state of the world in a decentralized way. It mediates between all participating nodes and thus finds a shared state of the world on which all can agree.

The Proof of Work consensus algorithm

There are a number of ways to reach consensus in decentralized systems. Most prominently, in their current implementation Bitcoin and Ethereum use the Proof of Work (POW) algorithm to reach consensus. Participating nodes must provide computing power to solve a mathematical problem, which signals to the rest of the network their validation of incoming transactions. Solving the problem and broadcasting it to the network is required to add valid transactions on the blockchain protocol. Once all participating nodes have agreed on the legitimacy of a data set or so-called block, it gets added to the chain. Nodes which participate in this validation process are called miners. Besides having a common mechanism to update a shared ledger, POW helps to secure the network from attacks.

This is because in order to carry out a successful attack on the network, one needs to expend an amount of energy bigger than the potential gains expected from the attack.

The protocol in other words provides no incentive to attack the network. Manipulation of the ledger comes at the economic loss of the attacker.

In total, POW provides the network with a way to reach consensus while at the same time securing the network from attacks.

What are the costs?

Even though POW delegates control over the network across all participating nodes and secures the network from attacks, there are a number of problems associated with the current implementation of POW. These problems only intensify as the networks intend to scale in adoption and number of transactions.

Most obviously, the POW protocol is heavily energy intensive. Energy needs to be expended by the miners to validate a block. As the network scales and more miners enter the mining process to meet demand for verifying transactions, mining becomes harder and thus the energy expended to secure the protocol rises.

It can be argued that Bitcoin was constructed in such a way that it attracts the highest possible number of electricity to further secure the network. Ignoring the goal of energy efficiency, Bitcoin was coded with the primary ambition to have a decentralized and secure ledger of transactions. This observation has led many prominent theorists in the blockchain space to regard Bitcoin as a form of life which independently sets incentives to extract energy from its users. This aspect of the POW algorithm is mirrored in the relentless consumption of energy by the Bitcoin protocol. Only recently did the Bitcoin POW energy expenditure surpass the energy consumption of developed countries such as Denmark and Iceland.

If Bitcoin ever were to become a major currency in use and the use of protocol were not to change at all, one can only imagine the immense magnitude of energy waste this would entail.

Another major downside of the POW consensus algorithm is that over time principles of decentralization have been neglected. In fact, as the Bitcoin network currently stands, POW is executed by an increasingly centralized system of miners. Current implementation of POW distinguish between a user of the network and the provider of the network. Even though miners on a POW algorithm can also be users of the network, in practice most users do not have the means to participate in block mining. The probability of a miner to mine the next block in the chain depends on their relative hashing power. To guarantee steady rewards for participation in the network most miners organize in a so-called mining pool, thus handing over control of the mining equipment to a pool manager. For example, in Bitcoin the five biggest mining pools control 75% of the hashing power.

Proof of Stake as an alternative to Proof of Work

Due to the enormous costs of running a POW consensus algorithm as evidenced in the Bitcoin protocol, developers have worked on many promising alternatives. So far, the most radical solution to proof of work as the blatantly inefficient consensus algorithm has been the proposal of a new consensus algorithm called Proof of Stake (POS).

In POS so-called forgers need to lock up stakes in the form of native tokens so they can legitimately participate in the validation of transactions. In case the forgers try to manipulate the shared ledger to their benefit, the locked-up stakes get slashed. This way forgers are incentivized to validate transactions correctly.

Depending on the relative amount of tokens a forger stakes, the probability they will be chosen as the next forger rises.

Because the staking mechanism requires no waste of energy to secure the network, it can be regarded as a more energy efficient system.

Additionally, all token holders can participate in the forging of new blocks through locking up stakes. This way the network retains its decentralized character.

Potential obstacles to Proof of Stake

Despite the apparent advantages of a proof of stake consensus algorithm over proof of work, there still remain a couple of roadblocks which stand in the way of long term adoption by the community.

First, experts in the community are skeptical of the security provided by Proof of Stake protocols. Even though POS allows for more flexibility when it comes to setting up rules for the network to protect itself against attackers, some experts doubt that it can provide the same amount of security known of a POW algorithm.

Second, the adoption of Proof of Stake blockchains depends crucially on user experience and how users can benefit fully from the various characteristics of a POS blockchain. To offer users maximum convenience we need to build an efficient ecosystem around POS protocols. Pool of Stake wants to offer users a place to stake their different tokens without the need to give up control over their assets. Users who stake their tokens through pool of stake remain in control of their assets, but do not have to conform to all the different requirements necessary to staking such as constant network uptime.

Outlook for Proof of Stake

Given the obvious limitations of POW inefficiency and the contrasting dynamic design of Proof of Stake protocols, the outlook for POS protocols appears promising.

The belief in the Proof of Stake protocol design has been reflected in the recent emergence of POS protocols such as Cardano and EOS to public attention. Notably, Ethereum plans to implement its Ethereum Proof of Stake protocol Casper in 2018/19.

Over the following weeks we will try to address roadblocks in a number of block posts and suggest potential solutions to support an enthusiastic and sustainable Proof of Stake community.

Today we had our project launch meeting. Good vibes, excellent team – we are ready to go!

Here a small preview of our whitepaper:
Pool of Stake (PSK) is a first of its kind, decentralized pool for Proof of Stake, the future of blockchain. Qtum, BOScoin, Tezos and other PoS coin holders can unite in the Pool of Stake and start Mining 2.0, generating daily forging rewards by simply staking their PoS coins. PSK is a fully decentralized, self-regulated and completely trustless pool. This is made possible by powerful use of Smart Contracts and globally distributed nodes. PSK makes Mining 2.0 more secure and more profitable for individual PoS coin holders. The main goal of PSK is to increase profits for small miners who unite in the Pool of Stake.For this purpose, an ERC-20 PSK utility token and an IOU token are used, ensuring that PSK members are always in full control of their staked coins. The PSK platform will provide
an analytics tool via a smart i.o. database that will allow PSK members to track, control and optimize their investments in a fully trustless way. In this white paper, we explain the implementation of PSK and its services. We elaborate the governance vision which will be developed in the coming months to ensure that the PSK community remains fair and agile. We then present detailed information relevant for the upcoming ICO starting 2 May 2018. We conclude the white paper with a review of our current accomplishments and an overview of projected milestones.