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What does Proof of Stake (PoS) mean in cryptocurrencies?
What is Proof of Stake (PoS)?
Proof of Stake is a blockchain consensus mechanism for processing transactions and creating new blocks. A consensus mechanism is a method for validating entries in a distributed database and keeping it secure. In the case of cryptocurrency, the database is called a blockchain, so the consensus mechanism secures the blockchain.
Find out more about Proof of Stake and how it is different from Proof of Work. Plus, learn about the problems proof-of-stake attempts face in the cryptocurrency industry.
Key points
- With 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 used to validate transactions and open 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 considered less risky regarding the potential for a network attack, as it structures compensation to make an attack less profitable.
- The next block writer on the blockchain is selected randomly, with higher stakes awarded to nodes with larger staking positions.
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Understanding Proof of Stake (PoS)
Proof of Stake reduces the computational work needed to verify blocks and transactions. Under the test of work, heavy IT requirements have maintained the blockchain Safe. Proof of Stake changes the way blocks are verified using coin holder machines, so you don’t need to do as much computational work. Owners offer their coins as collateral, called staking, for a chance to validate blocks and earn rewards.
Validators are randomly selected to confirm transactions and validate block information. This system randomizes who gets to collect commissions rather than using a competitive reward-based mechanism like proof of work.
To become a validator, a coin owner must “stake” a specific amount of coins. For example, Ethereum requires staking 32 ETH before a user can run a node. Blocks are validated by multiple validators, and when a specific number of validators verify that the block is accurate, it is finalized and closed.
To activate your validator you will need to stake 32 ETH; however, you do not need to stake such a large amount of ETH to participate in the validation. You can join validation pools using “liquid staking” which uses an ERC-20 token representing your ETH.
Different proof-of-participation mechanisms can use various methods to reach consensus. For example, when Ethereum introduces sharding, a validator will verify transactions and add them to a block shard, which requires no more than 128 validators to form a voting “committee.” Once shards are validated and a 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, validate information, and process transactions. Each method has proven effective in maintaining a blockchain, although each has pros and cons. However, the two algorithms have very different approaches.
In PoS, block creators are called validators. A validator checks transactions, verifies activity, votes on results, and maintains records. Under PoW, block creators are called miners. Miners work to solve a hashing problem to verify transactions. In exchange for solving the problem, they are rewarded with a coin.
To “acquire” the position of becoming a block creator, you must own enough coins or tokens to become a validator on a PoS blockchain. For PoW, miners must invest in processing equipment and incur large energy costs to power the machines that attempt to solve the calculations.
The equipment and energy costs involved in PoW mechanisms are expensive, limiting mining access and strengthening the security of the blockchain. PoS blockchains reduce the amount of processing power needed to validate block information and transactions. The mechanism also reduces network congestion and eliminates reward-based incentives offered by PoW blockchains.
| Block creators are called validators | Block creators are called miners |
| Participants must own coins or tokens to become validators | Participants must purchase equipment and energy to become miners |
| Energy efficient | Not energy efficient |
| Safety through community control | Robust security thanks to expensive initial requirements |
| Validators receive transaction fees as rewards | Miners receive rewards and commissions for blocks |
Proof-of-Stake Objectives
Proof of Stake is designed to reduce network congestion and address environmental sustainability concerns surrounding the Proof-of-Work (PoW) protocol. Work test it is a competitive approach to verifying transactions, which naturally encourages people to look for ways to gain an advantage, especially since monetary value is involved.
Bitcoin miners earn bitcoins by verifying transactions and blocks. However, they pay operating expenses, such as electricity and rent fiat currency. So what’s really happening is that miners are exchanging energy for cryptocurrency, which causes PoW mining use the same amount of energy as some small countries.
The PoS mechanism seeks to solve these problems by effectively replacing staking with computing power, whereby the network randomizes an individual’s mining ability. This means there should be a dramatic reduction in power consumption as miners can no longer rely on massive farms of disposable hardware to gain an advantage. For example, Ethereum’s transition from PoW to PoS reduced the blockchain’s energy consumption by 99.84%.
The first cryptocurrency adopt the PoS method was Peercoin. Many others followed soon after, but Ethereum was the blockchain where it had the greatest impact.
Proof of Stake security
Long touted as a threat to cryptocurrency fans, the Attack at 51%. This is a problem when using PoS, but it is unlikely to occur. With PoW, a 51% attack occurs when one entity controls more than 50% of the miners in a network and uses that majority to alter the blockchain. In PoS, a group or individual should own 51% of the staked cryptocurrency.
It is very expensive to control 51% of the staked cryptocurrency. According to Ethereum PoS, if a 51% attack occurred, honest validators in the network could vote to ignore the altered blockchain and burn the ETH staked by the perpetrator. This incentivizes validators to act in good faith for the benefit of the cryptocurrency and the network.
Most other PoS security features are not advertised, as this could create an opportunity to circumvent security measures. However, most PoS systems have additional security features that add to the inherent security behind blockchain and PoS mechanisms.
What is the difference between Proof of Stake and Proof of Work?
Proof of Stake (POS) uses randomly selected validators to confirm transactions and create new blocks. Proof-of-Work (POW) uses a competitive validation 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 in which distributed cryptocurrency validator programs share the task of validating transactions.
What are the disadvantages of Proof of Stake?
With Proof of Stake (POS) consensus, users generally need to own a cryptocurrency before they can participate in the consensus and earn more cryptocurrencies. To host a full validation node on Ethereum, a user needs to stake 32 ETH, which is very expensive. Another disadvantage of PoS is that on blockchains with smaller networks, a high minimum stake could lead to centralization.
Is Ethereum a PoS or PoW?
Ethereum uses proof-of-stake as its consensus mechanic. Full validation nodes require a stake of 32 ETH, but other participants can take part in the consensus by delegating their ETH to a validator or participating in staking pools. Users can also stake small amounts of ETH on their own, but no reward is earned.
The bottom line
Proof of Stake is a mechanism used to verify blockchain transactions. It differs significantly from proof of work, mainly in that it incentivizes honest behavior by rewarding those who put up their cryptocurrencies as collateral for a chance to earn more.
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