Proof of stake (PoS) is a consensus mechanism used to verify new cryptocurrency transactions. Since blockchains lack a centralized governing authority, proof of stake is a way to ensure that data stored on the network is valid.
What is Proof-of-Stake (PoS)?
Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks on the blockchain. A consensus mechanism is a method for verifying records in a distributed database and securing the database. In the case of cryptocurrency, the database is called the blockchain – that is, the consensus mechanism is provided by the blockchain. Learn more about PoS and how it differs from proof-of-work. You will also learn about the problems that it is trying to solve in the cryptocurrency industry.
What is Staking?
Staking is when people agree to withhold an amount of cryptocurrency in exchange for the ability to validate new blocks of data to add to the blockchain. These validators, or “stakeholders,” insert their cryptocurrency into a smart contract that is maintained on the blockchain.
The blockchain algorithm chooses validators to verify each new block of data based on the number of cryptocurrencies they have stored. The more you bet, the better your chances of choosing to do the job. When data deleted by a validator is added to the blockchain, a newly issued cryptocurrency is received as a reward.
Understanding of Proof-of-Stake (PoS)
Proof-of-stake reduces the amount of computer work required to verify blocks and transactions, which keeps the blockchain, and thus cryptocurrency, secure. It changes the way blocks are verified on coin-owner machines.
Owners offer their coins as collateral for the opportunity to verify blocks. Coin owners with staked coins become “validators”. Validators are randomly selected to “mine” or validate a block. This system randomizes who gets “mine” instead of using a competition-based mechanism like proof-of-work. To become a validator, a coin owner must “set up” a certain number of coins. For example, Ethereum will require 32 ETH to be staked before a user can become a validator. Blocks are validated by more than one validator, and when a certain number of validators confirm that the block is correct, it is terminated and closed.
Different proof-of-stake mechanisms can use different methods to validate blocks – when Ethereum moves to PoS, it will use shards to send transactions. The validator validates the transactions and adds them to the shard block, which requires at least 128 validators to validate. Once the shards are verified and the block is created, two-thirds of the validators must agree that the transaction is valid, then the block is closed.
How is Proof of Stake different from Proof of Work?
Both consensus mechanisms help blockchains synchronize data, verify information, and process transactions. Each method has proven successful in maintaining the blockchain, although each has its pros and cons. However, the two algorithms have very different approaches.
Within PoS, block creators are called validators. A validator reviews transactions, verify activity, votes on results, and keeps records. Under PoW, creators are called miners. Miners solve complex mathematical problems to verify transactions; in exchange. For investors to “buy” a position to become a block creator, all they need to do is buy a sufficient limit of coins or tokens needed to become a blockchain PoS validator.
With PoW, miners have to invest in processing equipment and have high energy bills to use the machines that try to solve the calculations. Equipment and energy costs under PoW mechanisms are expensive, which limits access to mining and strengthens blockchain security. However, PoS blockchains often allow greater scalability due to their energy efficiency.
Proof of Stake Targets
Proof-of-stake is designed to reduce the scalability and environmental sustainability related to the proof-of-work (PoW) protocol. Proof-of-work is a competitive method of verifying transactions that naturally encourages people to find ways to gain an advantage, especially when monetary value is involved.
Bitcoin miners earn bitcoins by validating transactions and blocks. However, they pay their operating costs such as electricity and rent in fiat currency. What happens is that miners exchange energy for cryptocurrency. The amount of energy required to mine a proof-of-work cryptocurrency has a significant impact on the market dynamics of price and profit.
Environmental aspects must also be considered, as PoW mining consumes as much energy as a small country. The PoS mechanism attempts to solve these problems by effectively replacing computing power with staking, with an individual’s mining ability randomly distributed throughout the network. This means that there should be a drastic reduction in power consumption, as miners can no longer rely on large farms with one-sided hardware to gain an advantage.
Proof of Staking Benefits
Proof of work has gotten a bad rap for the sheer amount of computing power – and electricity – it consumes. Due to increased concerns about the environmental impact of blockchains that use proof-of-work, such as Bitcoin, proof-of-stake offers a potentially better outcome for the environment.
“Globally, proof of work is most profitable where energy can be obtained at the lowest cost,” Smith said. It concentrates cryptocurrency mining in certain regions where electricity costs are the lowest. According to Smith, the proof of stake’s moderate energy consumption solves this problem and expands the infrastructure, which can make the blockchain system more stable.
Proof of stake opens the door for more people to join blockchain systems as validators. There is no need to buy expensive computer systems and consume large amounts of electricity to store cryptocurrencies. All you need are coins. Crypto exchanges like Coinbase, Binance, and Kraken offer betting as part of their platforms. There are even dedicated staking platforms like Everstake. Depending on the blockchain, cryptocurrency owners can earn a return of 5% to 14% on their holdings by staking.
Another advantage of proof-of-stake blockchains offers potential for the future: they can be more scalable than their proof-of-work counterparts. Smith says a proof-of-stake blockchain could theoretically support multiple simultaneous transactions without compromising security or decentralization.
Proof of Stake Security
Long recognized as a threat to cryptocurrency enthusiasts, a 51% attack is a concern if PoS is used, but unlikely. A 51% attack is when someone controls 51% of a cryptocurrency and uses that majority to change the blockchain.
In PoS, a group or individual must own a 51% stake in the cryptocurrency. Owning a 51% stake in cryptocurrency is not only very expensive – the staked currency is a guarantee of the privilege to “mine”. Miners who try to get a block using a 51% attack will lose all their staked coins. This creates an incentive for miners to act in good faith for the good of the cryptocurrency and the network.
Most other PoS security features are not advertised because they can create opportunities to bypass security measures. However, most PoS systems have additional security features in place that add to the inherent security behind blockchains and PoS mechanisms.
Proof of Stake Drawbacks
Some proof-of-stake implementations can make blockchains more vulnerable to various types of attacks than proof-of-work, such as cheap corruption attacks. The vulnerability to attacks reduces the overall security of the blockchain.
Validators holding large amounts of blockchain tokens or digital currencies can have a major impact on the proof system. The migration of a digital currency from proof of work to proof of stake is a complex and highly purposeful process. Any digital currency that wants to change consensus mechanisms must go through a rigorous planning process to ensure the integrity of the blockchain from start to finish and beyond.
Proof of Stake and Cryptocurrency
Mining power of Proof of Stake
Which Cryptocurrencies Use Proof of Stake?
Proof of Stake has become a popular consensus mechanism in the cryptocurrency world. Currently, there are about 80 different cryptocurrencies that use POS as their consensus mechanism. The most popular coins with Proof of Stake are:
It is still emerging as a blockchain consensus mechanism, but it has significant potential. Due to the low energy demand and high level of access that allows ordinary people to work as validators, Proof of Stake has several attractive features that could bring it into the mainstream for blockchain security.
With Proof of Stake (PoS), cryptocurrency owners validate transactions in bulk based on the number of coins dispensed by a validator.
Proof of Stake (PoS) was created as an alternative to Proof of Work (PoW), the original consensus mechanism used to validate a blockchain and add new blocks.
While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms require validators to simply hold and distribute tokens.
Proof of Stake (PoS) is considered less risky in terms of a potential network attack because it structures compensation in a way that makes an attack less profitable. The next block writer on the blockchain is randomly selected, assigning higher odds to nodes with larger betting positions.
Frequently Asked Questions:
- What is Proof of Stake vs. Proof of work?
Proof of Stake (PoS) uses randomly selected miners to verify transactions. Proof of Work (PoW) uses a competitive verification method to confirm transactions and add new blocks to the blockchain.
2. Is Proof of Stake a certificate?
Proof-of-stake is a consensus mechanism where cryptocurrency validators share the task of verifying transactions. No certificates are currently issued.
3. How do you get Proof of Stake?
Proof of Stake (PoS) is a built-in consensus mechanism used by the cryptocurrency network as validators. It can’t be earned, but you can help secure the network and earn rewards by using a cryptocurrency client that participates in PoS validation or by becoming a validator.
4. Can Bitcoin be converted to Proof of Stake?
Bitcoin may turn into proof of stake. Ethereum began its existence with PoW and is transitioning to PoS, but implementing the process into an established cryptocurrency could take years.