Understanding Blockchain Consensus Mechanism: Proof-of-Stake (PoS)
Proof-of-Stake (PoS) is a type of algorithm that is used in some cryptocurrencies. It is an alternative to Proof-of-Work (PoW), which is the method of mining that most cryptocurrencies use.
PoS is a modern consensus protocol that is powering newer cryptocurrencies and DeFi. Even major coins, such as Ethereum, upgraded and merged with the origin
The Ethereum Merge was one of the biggest highlights of 2022. By market capitalization, the largest PoS blockchains in 2021 were Cardano, Avalanche, Polkadot, and Solana. However, ETH has climbed to the top of the PoS blockchain, according to CoinMarketCap.
What Is Proof-of-Stake?
Proof-of-Stake is a consensus algorithm for blockchains that allows nodes to vote on the validity of transactions. The system rewards those who stake their coins by giving them a chance to produce the next block.
In PoS, instead of miners using their computers to solve complex mathematical problems to verify transactions and create new coins, nodes are selected based on the number of cryptocurrencies they own; this is called “staking.”
Before we explain further, let’s understand what staking means: Staking is when there is an agreement by people to lock up a certain quantity of crypto in return for the opportunity to verify newly added data blocks to a blockchain. These “stakers,” also known as validators, invest their cryptocurrency in a smart contract that is stored on the blockchain.
The more coins you own, the better chance you have of being chosen as a node. When a node is chosen, it can validate transactions and create new blocks, earning the miner a reward for their work in the form of interest on their balance.
This means that if you have a lot of cryptocurrencies, you will be able to create new blocks more often than someone who has only a little bit. But not just anyone can stake their coins; they need to have a minimum amount for it to be worthwhile for them financially.
The Advantages of Proof-of-Stake (PoS)
The main advantage of PoS over Proof-of-Work is that it does not require miners to consume enormous amounts of electricity and perform complex calculations to create a new block. In fact, it does not require any mining at all. Instead, users who hold the most tokens in the system are rewarded with additional tokens for each new block they create.
It is a way for people who have invested money in cryptocurrency to earn more crypto. In contrast, in proof-of-work systems like Bitcoin, miners must solve mathematical problems to add new blocks to the blockchain — which means that anyone with a powerful computer can participate in mining.
Due to the enormous amount of computational power and electricity proof of work uses, PoS has been argued as the consensus mechanism that may provide better environmental outcomes given the growing concern regarding the effects of blockchains using PoW, such as Bitcoin. In other words, PoS is more energy-efficient.
More people can participate in blockchain systems as validators thanks to proof of stake. To stake cryptocurrency, one does not need to purchase pricey computing equipment or use a lot of electricity. You only require coins.
The Disadvantages of Proof-of-Stake (PoS)
One of the most criticisms levelled at PoS is that it is less secure than PoW. Individuals with malicious intent can take control of the network by acquiring a huge amount of stake tokens because PoS does not require miners to expend energy to participate in the consensus process. This could result in security breaches and the theft of funds from blockchain network users.
Proof-of-Stake gives more power to those who have invested more resources into the network, which can potentially lead to centralization if too many people hold large amounts of tokens.
A validator may be subject to “slashing” if they submit inaccurate data or fraudulent transactions — their stake is “burned” or transferred to a wallet address that no one can access, rendering them completely useless.
Closing Thoughts
Proof-of-Stake (PoS) determines which blocks get added to the blockchain. As in Proof-of-Work systems, PoS systems use stake — the amount of cryptocurrency a certain user owns. Staking is a function that crypto exchanges like LBank offer.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
