What is proof-of-stake (PoS)?

Proof-of-stake is a method used in blockchain technology to process transactions and create new blocks. A consensus mechanism, like proof-of-stake, is a way to confirm entries into a shared database, keeping it safe and secure. In cryptocurrency, this database is called a blockchain, and the consensus mechanism helps protect it.
You can learn more about proof-of-stake and how it differs from proof-of-work. It also addresses certain issues in the cryptocurrency industry.

Key Takeaways

• Under proof-of-stake (POS), validators are chosen based on the number of staked coins they have.
• Proof-of-stake (POS) was created as an alternative to proof-of-work (POW), the original consensus mechanism for validating transactions and opening new blocks.
• While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms require validators to hold and stake tokens for the privilege of earning transaction fees.
• Proof-of-stake (POS) is seen as less risky regarding the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous.
• The next block writer on the blockchain is selected at random, with higher odds being assigned to nodes with larger stake positions.

Understanding proof-of-stake (PoS)

Proof-of-stake (PoS) makes it easier to verify blocks and transactions by reducing the need for computer power. In a proof-of-work system, high computing power keeps the blockchain secure. However, proof-of-stake uses the computers of coin owners to verify blocks, which requires less computational work. Owners put up their coins as collateral, known as staking, for the chance to validate blocks and earn rewards.

Validators are chosen randomly to confirm transactions and validate block information. This method randomizes the collection of fees rather than relying on competition, like in proof-of-work.

To become a validator, a coin owner must stake a certain amount of coins. For example, Ethereum requires 32 ETH to be staked before a user can run a node.

Multiple validators check each block. When enough validators confirm that the block is accurate, it is finalized and closed. Different proof-of-stake systems may use various ways to reach an agreement. For instance, when Ethereum introduces sharding, a validator will check the transactions and add them to a shard block with no more than 128 validators forming a voting “committee.” Once the shards are validated and a block is created, at least two-thirds of the validators must agree that the transaction is valid for the block to close.

Benefits of proof of stake

The PoS consensus mechanism offers several benefits to the cryptocurrency platforms that support the approach, including the following:

• Lower resource needs Adding a node to the blockchain requires less computing power.
• Less energy use Because less computing power is needed, the energy required to validate a transaction also decreases.
• Faster speed With Proof of Stake (PoS), a node can be added more quickly, allowing for faster transaction processing.
• Better scalability The PoS method can be more scalable than proof of work (PoW) because it requires fewer resources and lower costs compared to the hardware and energy demands of PoW.

Challenges of proof of stake

While there are numerous benefits to using PoS, there are some challenges, including the following:

• Potential for undue influence: Cryptocurrencies promise decentralization. However, with staking, a large holder may have too much control over transaction approval on a blockchain network.
• Staking conditions: In a Proof of Stake (PoS) system, your staked coins might be locked in a smart contract for a long time.
• Security concerns: Some people worry that PoS is less secure because it requires less effort to approve transactions. Large holders might have too much power, and PoS does not have as many transactions or a long enough history compared to Proof of Work (PoW). Therefore, it hasn’t been proven effective on the same scale.

Proof of stake cryptocurrencies 

In the growing world of cryptocurrencies, more coins are using Proof of Stake (PoS) as their method for reaching agreements. Here are some examples:

• Avalanche (AVAX): Launched in September 2020, Avalanche helps developers create decentralized applications (dApps). 
• Cardano (ADA): Founded in 2015 by Ethereum co-founder Charles Hoskinson, Cardano allows for smart contracts.
• Cosmos (ATOM): Created by the Interchain Foundation in 2014, Cosmos focuses on open-source blockchain technology.
• EOS (EOS): EOS has its own blockchain, which started in January 2018. Its goal is to speed up smart contracts.
• Ethereum (ETH): One of the most popular cryptocurrencies, Ethereum, switched to PoS in September 2022.
• Peercoin (PPC): Peercoin claims to be the first cryptocurrency to use PoS, starting in 2012.
• Solana (SOL): Launched in 2017, Solana aims to process transactions efficiently.

How is proof-of-stake different from proof-of-work?

Both consensus mechanisms help blockchains keep data in sync, validate information, and process transactions. Each method is effective at maintaining a blockchain, but they have different advantages and disadvantages.

In Proof of Stake (PoS), those who create blocks are called validators. Validators check transactions, verify activity, vote on outcomes, and keep records. In Proof of Work (PoW), the creators are called miners. Miners solve a complex math problem to verify transactions, and they earn coins as a reward.

To become a block creator in a PoS blockchain, you need to own enough coins or tokens. For PoW, miners must invest in expensive equipment and pay high energy costs to power machines that attempt to solve problems.

The costs of equipment and energy in PoW can be high, which limits who can mine and strengthens the blockchain’s security. PoS blockchains use less processing power to validate information and transactions. This mechanism also reduces network congestion and removes the rewards-based incentives that PoW has.

Goals of proof-of-stake

Proof-of-stake (PoS) is a way to keep networks running smoothly and to help the environment. It is different from proof-of-work (PoW), which is a method used to verify transactions. PoW can be very competitive and uses a lot of energy.

Bitcoin miners make bitcoin by checking transactions. They pay for things like electricity and rent with regular money. This means they use a lot of energy to earn cryptocurrency, which can be as much as some small countries.

PoS helps by letting people earn rewards based on how much they hold instead of using computer power. This means less energy is used because miners don’t need big machines to compete. For example, when Ethereum changed from PoW to PoS, it used 99.84% less energy.

What is the difference between proof-of-stake and proof-of-work?

Proof-of-Stake (PoS) uses randomly chosen validators to confirm transactions and create new blocks. Proof-of-Work (PoW) uses a competitive method to confirm transactions and add new blocks to the blockchain.

What is proof-of-stake for dummies?

Proof-of-Stake is a consensus mechanism where distributed cryptocurrency validator programs share the task of validating transactions.

What are the disadvantages of proof-of-stake?

In a Proof of Stake (PoS) system, users need to own cryptocurrency to take part in the process and earn more. To run a full validator node on Ethereum, a user must stake 32 ETH, which is quite costly. Another downside of PoS is that in smaller blockchain networks, a high minimum stake can lead to centralization.

Is Ethereum a PoS or PoW?

Ethereum uses proof-of-stake to confirm transactions. To become a full validator, you need to stake 32 ETH. However, anyone can participate in the process by delegating their ETH to a validator or joining a staking pool. Users can also stake small amounts of ETH on their own, but they won’t earn any rewards.

The Bottom Line

Proof-of-stake is a way to check transactions on a blockchain. It is very different from proof-of-work. With proof-of-stake, people earn rewards by using their cryptocurrency as collateral. This encourages them to act honestly for a chance to earn more.