Introduction to Proof-of-Work and Proof-of-Stake 3.0 Part 4

How BlackCoin’s and Qtum’s Pos 3.0 solves the issue of coin age and other potent

Peercoin calculated the proof hash for the blocks of its blockchain in a linear fashion by taking into consideration the number of coins that a member had, their age, and the current time target.

The problem with this approach is that it makes it possible for attackers to save up enough coins to become the node with the highest number of coins on the network, which can lead to an attacker overtaking the network. A malicious attacker could save enough coins to fork the blockchain and then start double-spending the coins. After this, the attacker would need to save enough coins to become the node with the highest number of coins if he or she wanted to spend them more than once again.

At the same time, saving all the coins to be able to perform an attack would either take a lot of time or a lot of coins, thus making all the other coins on the network less valuable, which would undermine the goal of the attack and making not very profitable. However, the fact that such an attack is possible has been a problem for PeerCoin and for proof-of-stake algorithm in general. In version 3.0 of BlackCoin’s PoS algorithm, the developers of BlackCoin have removed the “age” factor from the calculation of proof hash completely, making the proof hash rely only on the number of coins and target time.

 

The problem of greedy honest nodes on PoS networks

Another big problem of a decentralized cryptocurrency network that uses a proof-of-stake algorithm to create the blocks of its blockchain is honest greedy nodes. These nodes do not have a malicious intent to overtake the network or to spend the funds several times. They simply prefer to keep their coins offline in the hopes that when they take the coins offline, the supply of the coins online would go down and because of the laws of supply and demand, when the supply is low and demand is high or the same, the price of their coins would go up. Such nodes would log onto the network only periodically. They would accumulate enough coin age so that they can get the reward, go online to claim the reward, and then go offline again. To solve this problem, Blackcoin’s PoS 3.0 made the reward consistent, equal to 1.5 coins per block.

 

Multi-signatures and cold staking

Another significant improvement of PoS 3.0 compared to the previous versions was the introduction of multi-signature staking. The term “staking” as applied to PoS algorithms is similar to what mining is on proof-of-work networks such as Ethereum and Bitcoin.

On Bitcoin and Ethereum, miners solve mathematical problems to earn the right to add a block to the blockchain of the network. On a proof-of-stake network, users earn a right to create a block by having “a stake,” which is a number of coins. Making these coins available for participation in the process of choosing of who is going to create the next block on a PoS network is called “staking.”

One of the problems of many algorithms that run the staking process is that they only support adding coins to a stake with just one key, while multi-signature wallets have proven themselves to be very popular and secure.

A typical wallet on a cryptocurrency network has one user with one private key. This means that the user has absolute control over the wallet and all the addresses associated with the wallet. This is great when it comes to the management of personal finances, yet this is also a challenge when it comes to managing finances for an organization or a group of people because there is only one solution to what can happen with a regular wallet when several people need to be managing their finances together. This solution is one person having the private key to the wallet and people agreeing to make decisions together. This solution has a drawback in that if the person managing the wallet turns out to be a malicious actor, he or she can do anything with the funds because of the full control and others will not be able to do anything because transactions on cryptocurrency networks are irreversible.

Obviously, this solution is far from perfect, which is why developers have eventually created a multi-signature system where no single user has full control over a wallet and at least one other person needs to give consent to sending funds in any transaction. An account with this functionality is known as a multi-signature account.

From the operational standpoint, the biggest difference between a multi-signature account and a single-signature account is that a multi-signature account requires multiple private keys that are in the possession of multiple users. Receiving funds to a multiple-signature wallet works in the same way as with a single-signature wallet because during the receiving of funds no private keys are involved and funds are simply coming to an address on a network. An obvious problem with multi-signature wallets on the proof-of-stake networks has to do with users deciding to participate in the staking process and making multi-signature staking work together with single-signature staking.

The solution that the BlackCoin’s v. 3.0. PoS has implemented as related to multi-signature staking has been to let users place the signing key in a burn address, so that they can stake their coins as a regular transaction. This means that any input, be it a single-signature input, or a multi-signature one, is eligible for staking. This also gives PoS 3.0. a big advantage over cold staking, which is a technique that requires splitting the signatures between many different physical machines.