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Proof Of Stake Explained!

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Proof of stake can be rather confusing to most people. It is a pretty complicated system and is like trying to explain bitcoin to a outsider. You can sit and ponder ways to explain it all day. I have setup what is basically a over simplified explanation of it. More in depth understanding can be obtained through the wiki page below.

https://en.bitcoin.i.../Proof_of_Stake Keep in mind it is slightly outdated and only refers to the concept. Not the way it was fully implemented in PPC which all others are derived from.

What Is proof of stake?

Proof of stake is a method of securing the network. Through various means. It is a system that rewards the miners for securing the network. They do this by minting POS blocks. Pos blocks are similar to Pow or proof of work blocks. Except no power hungry mining is required to earn them. They secure the network in the same way as POW blocks and make 51% attacks very difficult. You would need to have a sufficient amount of the currency up to 51% as well as 51% of the hashpower to invalidate both the POS and POW blocks making a 51% attack very costly to the malicious person.

I am currently not sure if Pos blocks can carry and confirm transactions. I have sent out a request to sunny king for this info. I believe they do. If true they would also speed up confirmation times and the network as a whole.

So how do I "Mint" Pos blocks?

Once you are eligible you simply need to have your wallet open and "unlocked for minting" to mint POS blocks. Unlocked for minting means it is either not encrypted or You have unlocked the wallet through various means. Described in 2 methods below.

The first method will unlock your client permanently until it is closed and reopened again. The downside to this is less security. Your wallet will remain open and unlocked at all times unless you close it. LEaving it vulnerable if there is malicious software on your computer. Although it is rare people have lost coins from there wallet due to malicious activity This method is the easiest method to use but requires a little setup

The second method unlocks your wallet for a set amount of time. The disadvantage to this is you may forget and the wallet may become locked again. Missing out on possible POS blocks. It is more secure becasue if you forget it will eventually lock again keeping your coins safe from malicious attackers.


How do I become eligible for POS rewards?

POs blocks require you already have at least a certain number of the currency in your wallet already. For instance PPC is only requires 1 coin. I believe Bitgem, Novacoin, Bitbar, Yac and Bottlecaps are the same but It will require more investigation of the code for me to ensure this.

Eligibility is earned when your coins have sufficient "Coin Age". Coin age refers to the amount of time the coins have been inactive. Meaning they have not been transferred across the network or moved from the wallet. 30 days of coin age is required for your coins to be eligible to earn POS rewards. You do not need to have your client open or do anything to gain coin age. Just dont move them. You can have some coins that are eligible and others that are not in your wallet.

For Example:

Say you receive 1 coin on Jan. 1st and another on Jan. 15th. You would be eligible to receive POS rewards on Jan 30th. Except your POS reward, if you received one would only be based on the 1 coin that is eligible.

How much will I receive for my POS Block?

The amount of the POS block you receive will be a % of your "staked" coins. Staked coins are the amount of coins you had eligible for POS rewards when you minted a POS block.

I am not 100% clear on this part It may only take a portion of your eligible coins I am not sure how this is determined. I have pm'ed sunny king the PPC developer and I will edit once I am sure.

The POS block will be for a % of those staked coins. The POS ROi as it is know varys depending on the hashrate and the POS difficulty. It can be anywhere from 1-3 %

How will I know that I am POS minting?

If you have eligible coins and your wallet is open you are POS minting. The only way to turn it off is set reservebalance=0 or not have any eligible coins

How will I know when I receive a POS block?

A pos block will show up in your transaction log as a normal POW block. Except of course it will be of different size than a POW block. You will also notice that in the overview tab of your client you will see some coins have moved from your available balance into the "staked' category. These are to coins that were used to generate your POS block. Both these coins and your new POs block will be unavailable for the same number of confirmations as a POW block. For instance it would be 520 Confirmations for Bitgem or 6 for Bottlecaps. I couls be wrong on the bottlecaps front. I will speak to the developer and update accordingly.

You mean my coins can suddenly become unavailable? How do I prevent this if I plan to spend the coins soon?

You can set a certain amount of coins to be set aside and ineligible to use for POS rewards. This is done through a simple rpc command or a more permanent method is adding the same line to your .conf file

reservebalance=x ( x= the number of coins to reserve)

This will make sure x number of coins will not be staked for POS rewards. Coin age can still be earned on your reserve balance. Simply remove the command to resume POS minting with those coins

So overall what are the benefits to POS?

First off proof of stake is the most effective way of preventing 51% attacks. The malicious person would need to invest a lot of money to gain a substantial amount of the currency. Through either purchasing 51% of the entire currency or mining with 51% of the network hashrate for over 51% of the blockchain life.. Costing them lots of money in hardware and electricity.

Secondly is encourages miners to hold there coins and earn what people like to refer to it as interest. Which can make for a much more stable market value. It encourages a sort of storage of your "digital wealth". Where you know the market value should be more stable ( after the initial dump phase of course refer to the NVC price over the last few months )and you will earn interest on your coins just by helping secure the network on which the coins are stored. Its self reinforcing in the idea that you get rewarded for POS minting. On many different fronts. Not just your POS rewards.

Also proof of stake may be a the solution to the "Tragedy of the Commons". https://en.bitcoin.i..._of_the_Commons

When the POW block reward rounds to 0, The only reward miners or "nodes" will receive are transaction fees. People might lose interest in mining. Dropping the difficulty leaving the network open to 51% attacks. Proof of stake minting will still earn users the extra income. As they can mine for tx fees at a pool and POS mint at the same time. POS will take over as the main security for the network and help give incentive to miners also further stabaliizing the marrket vaklue. If pos reward is too high everyone will POS mint and the currency will become too rare. Either skyrocketing or plummeting in value. Too low and miners will lose incentive and the network will be open for 51% attacks again. It is a fine balance

I really hope I didn't confuse you further and helped open a window to the idea of Proof of stake. I over simplified a few things here to give you a basic understanding. This way if you want to go further into it you have a basic knowledge to start with.
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