Cardano uses a new proof of stake algorithm called Ouroboros, which determines how individual nodes reach consensus about the network. The algorithm is a crucial part of the infrastructure that supports the Ada cryptocurrency and is a major innovation in blockchain technology.
Ouroboros eliminates the need for an energy-hungry proof of work protocol, which stands as a barrier to blockchain scaling up for much wider use.
Designed a team led by IOHK Chief Scientist, Professor Aggelos Kiayias, Ouroboros is the first proof of stake protocol that has mathematically been shown to be provably secure, and the first to have gone through peer review through its acceptance to Crypto 2017, the leading cryptography conference.
The level of security demonstrated by Ouroboros compares to that of Bitcoin’s blockchain, which has never been compromised.
What is proof of stake?
In proof of work, miners invest computing power to compete to be chosen as the leader who gets to make the next block and win a reward for doing so. By contrast, in proof of stake, the stakeholder who will form the next block is randomly selected, proportionally to the size of the stake that they have, according to the blockchain ledger.
“Proof” means having evidence that blocks of transactions are legitimate. “Stake” means the relative value held by addresses on the node. “Relative value” is all the value held by wallets on a particular node divided by total value in the system.
There have been a number of attempts by other cryptocurrencies to develop a proof of stake algorithm, although these protocols have suffered from flaws and have not been shown to be provably secure.
For a blockchain to be secure, the means of selecting a stakeholder to make a block must be truly random. An innovation of Ouroboros to produce the randomness for the leader election process is to do this by way of a secure, multiparty implementation of a coin-flipping protocol.
This video produced by IOHK explains how the Ouroboros algorithm works: