Cryptocurrency trading

In a Proof of Work verification, there are two main participants, full nodes and miners.

Full nodes verify transactions to be added on a block and broadcast them to the network. They ensure compliance with the protocol rules, check for double spending and that transaction fees are paid. They verify that digital signatures are valid and place transactions in a mempool (a waiting room) to be picked up by miners.

Important: Full nodes can also be miners. If they are not mining, they can use normal computers and they don’t get any rewards.

_________________________________

Miners can also be full nodes. During mining, they pick up confirmed transactions from the mempool, they group them together and hash them (through the merkle tree process – see image below). They add the previous block’s hash and a random number called nonce and compete to find the correct nonce that validates the block. The winner gets the specified reward.

Important: Mining requires heavy computational power. On the bitcoin blockchain, they produce a block every 10 minutes. Any fees attached to the transactions they include in the new block, are also given to the successful miner.

Proof of Stake (PoS) was introduced in 2012 with the idea is that PoW is wasteful. The immense computational power and electricity consumption required to validate and produce blocks needed to be replaced with something more efficient.

What is PoS? Blocks are minted or forged (not mined)

Instead of using miners, PoS uses validators that stake a number of native coins (native to the blockchain) that allows them to propose new blocks. Think of the staking like a security deposit. The higher the stake, the more chances the forger can become a validator.

The choice of who will validate cannot be left with only the highest stakes otherwise the same people would be chosen every time. Some algorithmic activity finalizes the choice.

For example, coin age based selection takes the number of days the staked deposit is held and multiplies that by the no of coins staked. Coins are held for 30 days before they can compete. Once they become validators, their coin age is reset to 0. Waiting of 30 days is required before they can compete again. As for the rest of the nodes (once 2/3 of them reach a consensus), they verify the newly proposed blocks and add them to the blockchain.

___________________________________________

How does PoS ensure can you trust a validator?

If a transaction is wrongly validated, validators can lose more than they could gain. Rewards are high enough to promote good behavior. Bad behavior is followed by hard penalties, like losing a portion of the staked deposit.

Pools

Validators can form groups (pools) and connect their stakes to increase their chances of becoming validators. This is common practice with PoW as well, when nodes form pools to increase their hashing power and solve the puzzles faster. With PoW though, if the pooled miners gain 51% computational power, they can control and hack the network in what is known as 51% attack.

The 51% attack that is possible with PoW is not practical with PoS. To own 51% of stake, would mean to own 51% of all cryptocurrencies on the blockchain.

If a node stops being a validator, the coins staked and rewards will be released after a period of time to make sure no fraudulent transactions were validated