Proof of work consensus algorithm provided us with a feasible solution for the generalized version of the two generals problem. But it still had some notable drawbacks and limitations. The significant issues with proof of work algorithm are the nounce value which is clubbed with the block data keeps on increasing as people have started using more powerful machines to calculate the block hash and undergirds since blockchain works to maintain the block time, blockchain increases the difficulty to counter the large machines, which in turn requires much more substantial and fostered computers to solve the nonce value. These large machines need a lot of energy for running in solving the nonce value. This never ending cycle is not a suitable solution. If you take the example of Bitcoin Currently Bitcoin takes in more energy than the whole country of Ireland within a year.

The solution to such problems came with a new type of consensus algorithm, which is proof of stake. Proof of stake consensus algorithm is similar to the concept of stakeholders. In proof of stake, we define the stakeholders as the miners holding the coins and earning the transaction fees. There is no block reward concept in proof of stake. Let's understand the proof of stake consensus algorithm with an example. Suppose you created a blockchain with a maximum supply of 100 coins.

You have four users connected to the blockchain. The Hundred coins for your blockchain are divided within these four users. User a is holding 40% of the coins. Use a B is holding 30% of the total coins users See is holding 20% of the coins. And finally, user D is holding 10% of the total coins over the blockchain. Now, whenever a transaction occurs on the blockchain, there will be a transaction fee associated with the transaction.

This transaction fees will be divided between the stakeholders. In our case, the users holding the coins will earn the transaction fees. The transaction fees will be divided between users as per percentage of the coins they are holding over the blockchain. For our example, let's suppose if a transaction occurred over the blockchain has a transaction fee of $1. User a will receive 40% of the transaction fees, which is 40 cents. User B will receive 30%, which is 30 cents.

User C will receive 20%, which is 20 cents and user D will listen If 10% which amounts to be 10 cents respectively. This is how the proof of stake functions and salts the drawbacks of proof of work consensus algorithm. In the proof of stake consensus algorithm, the digital currencies are created only at the start of the chain, which is why there is no block reward present and the amount of digital currencies never changes, the stakeholders only take the transaction fees. Now, let's understand the proof of stake consensus algorithm with the help of a diagram. As you can see in the image, proof of stake is like a slice of a pie. Anyone who is holding the currency over the blockchain can become a miner.

With the proof of stake consensus algorithm the chance of mining and earning rewards are based on how much steak the users have over the blockchain. Users finally received the part Have transaction fees as a slice of pie as per their stake on top of blockchain. As you can view in the example shown on the screen, this is similar to a whole pie where everyone inside the network earn some share of the pie, which is the transaction fees according to the percentage of tokens they are holding in their accounts. One of the examples of a project running proof of stake consensus algorithm is the Neo blockchain. Neo blockchain is also known as China's aetherium Neo is a smart contract development platform, and it aims to be the creative economy, where digital assets could be securely traded between participants. Neo has an internal currency which is known as gas.

If you want to stake within the Neo blockchain network, you need to generate or hold the gas tokens, the more gas you have Have the more percentage for transaction fees you will receive. Apart from that Neo also rewards its stakeholders with an annual return of four to 6%. Currently, aetherium is also planning to move to the proof of stake consensus algorithm, with their plan released known as Casper. aetherium will provide a hard fork for the blockchain, which means both proof of work and proof of stake models will be available as separate chains. The proof of stake consensus algorithm helps us to solve the problem of massive computing power and energy required for confirming the blocks over the blockchain. On the other hand, it creates one more problem inside the blockchain that rich are getting more richer and poor are getting more poor.

Because as per your total tokens hold inside the blockchain, you will receive the transaction fees which is not as good Table solutions for many projects. To tackle such problem another consensus algorithm came into market which is known as delegated proof of stake. Now let's go and understand about delegated proof of stake.