What is Proof-Of-Stake (PoS)?

By iTrustCapitalMarch 23, 20223 minutes read
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Understanding Proof of Stake

You may have heard about how cryptocurrency mining uses a massive amount of energy. But did you know that there are different ways to process cryptocurrency transactions and create blocks in a blockchain, some of which may not be as resource intensive. Proof of stake is a methodology that processes transactions and validates blockchains for a cryptocurrency.

Let’s delve further in proof of stake to find out more about what it is and how it works. 

What is proof of stake?

Proof of stake (PoS) is a protocol that some cryptocurrencies use to achieve distributed consensus—to create and maintain agreement across the crypto’s network about the activity occurring in the network. The PoS methodology, like its better known cousin proof of work (PoW), is used to both process transactions and mint new cryptocurrency.

The PoS protocol delegates authority to users in a crypto network based on how much of the cryptocurrency a user “stakes” as collateral. The PoS protocol is a process of validation, rather than mining.

How does proof of stake work?

Here’s how proof of stake (PoS) validation works, with the end result that cryptocurrency transactions are processed and new coins or tokens are minted:

  • Unvalidated transactions enter a pool and PoS validators are randomly selected to process (validate) the transactions. The same process is used to mint new cryptocurrency.

  • In order to be considered as a PoS validator, you have to own the applicable cryptocurrency - the  more a particular validator owns, the more they can “stake”. A set amount of cryptocurrency is typically required to be staked in order to become a validator.  

  • The PoS validators typically have the longevity of their stake and history of accurate validations considered by an algorithm to give them more weight in the “random” selection. 

  • When selected, a PoS validator earns the authority to process the pool of transactions and add a block to the blockchain.

  • The validator is rewarded with more of the same cryptocurrency, with the exact amount proportional to the amount of crypto the validator has staked.

  • The validator now has more crypto to stake, as well as increased longevity and accuracy that may assist them in being selected in the future.

Proof of stake vs. proof of work

Proof of stake validation and proof of work (PoW) mining are the two main protocols used to add blocks to a crypto blockchain. Let’s take a closer look at how they compare:

  • Transaction processing method: PoS validation is based on the amount of cryptocurrency a user owns and stakes, while successful PoW mining is accomplished using vast computing power.

  • Hardware required: PoS validation only requires an internet connection, whereas PoW mining requires the purchase of extensive computer hardware.

  • Energy use: PoS validation is not energy intensive, unlike PoW mining which requires significant amounts of energy to support vast computing power.

  • Cost: Validating crypto transactions using PoS is less costly than mining crypto using PoW because PoW miners are required to both buy expensive hardware and use high amounts of energy indefinitely.

  • Vulnerability to 51% attacks: Cryptocurrencies that use PoS validation are generally not vulnerable to hacking by groups of malicious actors seeking to take majority (51%) control. That’s because achieving majority control would require owning 51% of that cryptocurrency. Cryptocurrencies that use PoW mining are more vulnerable, as taking 51% control can be accomplished by controlling 51% of the crypto network’s mining power.

Cryptocurrencies using proof of stake

An increasing number of cryptocurrencies are using proof of stake. Examples include:

  • Cardano (ADA): Launched in 2017, this cryptocurrency is currently the largest by market cap to use the PoS protocol.

  • Peercoin (PPC): Peercoin, which launched in 2012, was the first cryptocurrency to use the PoS mechanism. Peercoin uses a hybrid methodology that combines PoS and PoW. 

  • Tezos (XTZ): Tezos is a decentralized blockchain network that facilitates peer-to-peer transactions. Launched in 2018, Tezos has always used the PoS consensus mechanism.

  • Cosmos (ATOM): Established in 2017, Cosmos is a decentralized network of blockchains that uses PoS to achieve distributed consensus. 

  • Ethereum (ETH): The second-largest cryptocurrency by market cap, launched in 2015, Ethereum is gradually transitioning to PoS. 

The future of proof of stake

Cryptocurrencies are increasingly exploring the possibility of transitioning to PoS. 

Cryptocurrencies that launch in the future will be faced with two viable options—PoW and PoS—to achieve network consensus. With the resource intensity of PoW mining increasingly under the spotlight, more cryptocurrencies may choose PoS to process crypto transactions and mint new cryptocurrency.

DISCLAIMER

This article is for information purposes only.  It does not constitute investment advice in any way.  It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.  

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