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What is Proof of Stake (PoS)? How does Proof of Stake work?

In the crypto world today, there are two main consensus algorithms: proof-of-work and proof-of-stake. Let's explore what proof-of-stake is, and how it works in this article.
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lochoang
9 min read
Published Nov 12 2017
Updated May 30 2024
what is proof of stake

What is Proof of Stake?

Proof of Stake is a consensus algorithm that allows people to earn rewards for validating blocks on a blockchain. Unlike Proof of Work (which is used by Bitcoin), there is no need for expensive mining hardware or large amounts of electricity.

Instead, the network selects individuals to validate blocks based on how many coins they own. The higher your stake in the network, the more likely you are to be selected for validation - hence the name Proof of Stake.

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what is pos
Proof-of-Stake (PoS)

Proof of Stake explanation

Advantages

As compared to other types of blockchain protocols, such as proof-of-work (used by Bitcoin), there are several key advantages of using proof-of-stake. These include:

Hardware Efficiency: With a Proof-of-Stake blockchain, it’s possible for anyone to set up specialized nodes on their own computer or server at home or in an office. These nodes represent stakeholders who have invested their own money into the system by buying some cryptocurrency units prior to participating in the verification process.
Increased scalability: Since validation can be done by anyone with a stake in the network, the overall amount of computational resources needed to run the network is greatly reduced. This allows for increased transactions per second and improved scalability overall.
Reduced energy consumption: One of the biggest criticisms of proof-of-work protocols is the astronomical amount of energy that they consume. Proof-of-stake protocols are much more energy-efficient, as they don't require large amounts of computational power to function.
Improved decentralization: Since anyone with a stake can participate in block creation/confirmation, it leads to a more decentralized network overall - which is one of the key goals of blockchain technology.

Disadvantages

There are also a few disadvantages of Proof-of-Stake, such as:

Low security: Since anyone can become a validator by simply owning coins, there is little to no barrier to entry. This makes the network more susceptible to 51% attacks.
Less energy efficient: In order for proof-of-work systems to function properly, they require a significant amount of energy. Proof-of-stake, on the other hand, doesn't have this same requirement which makes it less energy-intensive. However, this also means that it's not as secure as proof-of-work since there's less of a disincentive for malicious actors.
Poor incentives: Since stakers have the ability to censor transactions and earn rewards by doing so, there is a potential for them to abuse their power. This could lead to increased centralization within the network and present some major security risks.
Tokenomics: In order to participate in staking, individuals often have to lock up their tokens for a specific period of time. This can be seen as a disadvantage because it means that they are not able to use their tokens during that time.
Complicated setups: In order to properly set up a proof-of-stake system, there needs to be a significant amount of coordination between all of the stakeholders. This can sometimes be difficult to achieve and can lead to delays in the system.

These are just some of the main disadvantages associated with proof-of-stake. While it does offer a number of benefits, there are also some potential risks that need to be considered. As blockchains continue to evolve and become more mainstream, we may see new solutions develop that address these issues.

How Proof of Stake Works

With PoS, instead of mining new tokens, users can validate transactions in return for a reward. The amount of the reward is proportional to the number of coins that the user holds.

This means that users who hold more coins have a greater incentive to validate transactions, as they stand to earn more rewards. Furthermore, since there is no need for expensive hardware or large amounts of electricity, PoS is generally considered to be more environmentally friendly than PoW.

There are a few different ways that PoS can be implemented, but the most common method is known as "delegated Proof of Stake" (DPoS). With DPoS, users vote for validators, which are then responsible for verifying transactions and committing them to the blockchain. The validators are rewarded with transaction fees, and they must also have a certain amount of tokens staked in order to be eligible for the role.

This system is designed to prevent centralization, as the validators are chosen by the community rather than being appointed by a single entity. It also means that users can earn rewards even if they do not hold a large number of coins, as they can simply delegate their vote to a validator that does.

How are transactions validated in Proof of Stake?

With Proof-of-Stake (PoS), cryptocurrency owners validate block transactions based on the number of coins a validator stakes. The validator's stake gives them an economic incentive to validate blocks truthfully. While a validator can technically validate any block, they are more likely to validate blocks that pay them a higher reward.

Unlike proof-of-work (POW) systems, which rely on miners solving computationally intensive puzzles to validate transactions and add blocks to the blockchain, POS systems require validators to simply put up a deposit, or stake, in order to be eligible to validate transactions and add blocks. The size of the deposit affects the validator's chances of being chosen to add a block.

What gives miners incentive on Proof of Stake?

There are several key factors that give miners incentive on Proof of Stake:

ethereum miner revenue
Ethereum's miner revenue by month
The Block Reward: Miners receive a block reward for successfully validating blocks, which provides them with an incentive to continue mining.
Transaction Fees: In addition to the block reward, miners also receive transaction fees for each transaction they validate. This provides them with an additional incentive to validate transactions.
Security: By validating blocks and transactions, miners help to secure the network and earn rewards for doing so.
Reputation: Over time, miners who consistently validate blocks and transactions will build up a reputation for being reliable and trustworthy. This can lead to more people using their services, which in turn can lead to more rewards.
Network Effects: As more people use and rely on the network, it becomes more valuable. This creates a positive feedback loop where more users lead to more value, which leads to more users, and so on. This increases the incentive for miners to participate in the network.

Compare Proof of Stake with Proof of Work

compare pos vs pow
There are several advantages and disadvantages that PoS algorithms have over PoW

Proof of Work and Proof of Stake are two methods that can be used to secure a blockchain. They differ in several important ways, including the costs involved and the level of control they confer on those who validate transactions. Let’s take a closer look at each one to better understand how they work and the advantages and disadvantages of each approach.

The first major difference between Proof of Work and Proof of Stake is their cost structure.

In a Proof-of-Work system, miners need to expend significant resources-both, financial and computational – in order to participate in the verification process for new transactions. This makes it expensive for an individual or organization to attempt a 51% attack since such an effort would require them to build and operate a data center full of specialized hardware for several years.
By contrast, a Proof-of-Stake system can be expensive only for those who wish to participate as validators. This means that anyone with enough cryptocurrency to stake could potentially try to gain control of the network by staking a large portion of the currency and voting against any other proposals. However, this is unlikely because it would require them to put their entire investment at risk in order to do so.

In addition, Proof of Work gives almost complete control over which transactions are included in new blocks to those who contribute the most hashing power or computational capability. Conversely, Proof of Stake lets participants validates blocks by locking up some amount of cryptocurrency as collateral. Validators thus have an incentive to act in the best interests of everyone using the network, since their “investment” is at risk if they don’t.

Finally, Proof-of-Work systems generally rely on a competitive marketplace for the generation and continuous improvement of new mining hardware. This can lead to wasteful spending on redundant or overly specialized equipment since miners are forced to spend money constantly just to stay in business. This kind of arms race is not found within Proof-of-Stake networks, which means that validators will not waste as much energy or other resources securing transactions.

Overall, these differences mean that each system has its own advantages and disadvantages when compared to the other. Many people believe that Proof-of-Stake will eventually replace Proof-of-Work as the primary means of securing a blockchain, as it is more efficient and provides greater decentralization. However, both systems have their own strengths and weaknesses, and it remains to be seen which one will ultimately come out on top.

How Secure is Proof-of-Stake?

That is a tricky question, with no clear answer. On the one hand, many experts believe that proof of stake systems are more secure than proof of work alternatives - because they remove the incentive for miners to try and control all of the network's hashing power.

On the other hand, proof-of-stake systems are still relatively new. This means that it's possible that there may be some unknown weaknesses in these systems, which could lead to security breaches or problems.

For this reason, it's wise to be very cautious when using any new system, including proof-of-stake networks. To ensure your own security on such networks (or on even well-established ones), it is important to always use strong passwords and keep your private keys and other sensitive information protected.

This is good advice for proof of stake networks, as well as for all other systems that you use online.

How to mine Proof of Stake coins?

how to mine pos
PoS make it simple to earn profits

To mine coins in Proof-of-Stake, all you need to do is hold onto your coins in a wallet that supports staking. When you stake your coins, you are essentially holding them as collateral to help secure the network and earn rewards for doing so.

The more coins you stake, the higher the rewards you can earn. Staking is a great way to earn passive income from your cryptocurrency holdings, and it’s also a good way to help secure the network.

If you’re looking to get started in Proof-of-Stake mining, there are a few things you need to know.

First, make sure you have a wallet that supports staking.
Second, make sure you have enough coins to meet the minimum requirements for staking.
And finally, make sure you understand the risks involved.

Proof-of-Stake mining is a great way to earn passive income from your cryptocurrency holdings. However, it’s important to understand the risks involved before getting started. Make sure you have a wallet that supports staking and that you have enough coins to meet the minimum requirements.

Also, be sure to research the different types of Proof-of-Stake mining before choosing one that best suits your needs.

Conclusion

I hope you enjoyed reading this explanation of proof-of-stake. As a recap, proof-of-stake is a way to secure a network by requiring users to put up a stake, or deposit, in order to validate transactions. The larger the stake, the more "skin in the game" the user has, and the more incentive they have to behave honestly.

There are many different variations of proof-of-stake, and it's still an active area of research. But I think it's safe to say that proof-of-stake is here to stay, and it's likely that we'll see more and more cryptocurrencies moving to this consensus algorithm in the future.