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Proof of Stake protocol and Ouroboros in Cardano

Updated: May 9

Learn about the Proof of Stake and Ouroboros benefits

Proof of work versus proof of stake illustration


Goodbye to Transactions Relied on Institutions

Throughout human history, trust has been a cornerstone in all kinds of transactions, from commercial exchanges to legal processes. For centuries, we have relied on institutions like notaries and banks to ensure the authenticity and integrity of these exchanges.

However, with the advent of blockchain technology, we are witnessing a radical shift in this dynamic, bypassing intermediaries and ensuring that each transaction is recorded immutably on the blockchain, visible to all parties involved.

Proof of Stake Protocol

Proof of Stake (PoS) is a type of consensus mechanism or protocol that provides a mechanism for verifying transactions in a decentralized and secure manner. Essentially, a consensus protocol controls the laws and parameters governing the behavior of blockchains. In the context of PoS, participants or validators play a crucial role in confirming transactions and maintaining the integrity of the network.

One of the key features of PoS is its focus on decentralized verification of transactions. Instead of relying on a centralized authority to validate transactions, PoS relies on a distributed network of validators, each of whom is tasked with confirming the authenticity and accuracy of transactions. Thus, rather than being controlled by a single central authority, Cardano uses a consensus protocol for distributed network participants to agree on the network history captured on the blockchain, reaching consensus on what has happened and continuing from a single source of truth.

This decentralization eliminates the need to trust third parties, such as the government or financial institutions, to ensure the validity of transactions. Instead, trust is distributed among network participants, increasing the security and transparency of the system.

PoW vs. PoS

Proof of Work (PoW) is a synchronous protocol that encourages miners to compete to be the first to solve any problem within the block. A reward system is used to incentivize this problem-solving. However, this approach comes at a cost, with increased electricity consumption and longer time periods to solve problems within the chain. These factors can significantly slow down the network and mean that it is costly to maintain. So how could we do all this more efficiently? The answer lies in Proof of Stake.

PoS differs from Proof of Work (PoW) in its focus on energy efficiency and equitable participation. While PoW requires validators to compete against each other to solve complex computational puzzles and verify transactions, PoS assigns the right to do so based on the amount of cryptocurrency validators stake as collateral: as a user's value increases, so does the opportunity to maintain the ledger.

This means a greater likelihood of producing new blocks that can be added to the blockchain and timestamped accordingly. The creator of a new block is chosen through a combination of randomness and the determination of their stake, or wealth, so that any participant who accumulates transaction fees, as they advance, could become the leader within the chain. This approach encourages steady and stable growth, avoiding stalled transactions that hinder growth.

Some of the primary advantages of PoS over PoW include:

  • Rigorous security protocols incorporated into a PoS protocol.

  • Reduced centralization - the risk of centralization is reduced by imposing penalties for selfish practices within the network.

  • Energy efficiency - energy consumption is extremely efficient, as a smaller amount of electricity, as well as hardware resources, are needed to produce and run the blockchain.

  • Cost efficiencies - PoS currencies are far more cost-effective than those operating on PoW protocols.

The Advantage of Ouroboros

While staking cryptocurrency as collateral serves as an incentive for validators to act honestly and in the network's best interest, PoS also faces challenges and risks. One of the main ones is centralization, especially if wealthier validators accumulate a disproportionate amount of cryptocurrency, giving them greater control over the network.

To address this issue, the Ouroboros protocol uses a validator selection algorithm that takes into account various factors, including the amount of cryptocurrency staked and its age, to ensure a more equitable distribution of verification power.

Ouroboros is the first blockchain consensus protocol developed through peer-reviewed research. At the heart of the protocol are stake pools: reliable server nodes managed by a stake pool operator to which ADA holders can delegate their stake. Stake pools are used to ensure that everyone can participate in the protocol, regardless of technical expertise or availability to keep a node running. These stake pools focus on maintenance and hold the combined stake of various stakeholders in a single entity.

Greater Transparency and Trust

For the first time, we witness a decentralized and transparent system that redistributes trust among network participants. Once you understand what is proof of stake protocol and Ouroboros in Cardano, you'll know that we no longer need intermediaries; each transaction is recorded immutably on the blockchain, visible to all parties involved.

This change marks a milestone in history, as it allows us to conduct secure and verifiable exchanges without relying on a central authority, transforming the way we carry out our economic interactions. It's the beginning of a revolution that will change the way we understand and conduct transactions forever.

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