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Proof of Stake: All You Should Know

Proof of Stake: All You Should Know

Proof-of-stake is a method of maintaining the integrity of a cryptocurrency, preventing users from printing extra coins they didn’t earn. 

Proof-of-stake can also be likened to “consensus mechanisms,” – the method by which a blockchain maintains its integrity. Consensus is what addresses the “double spending” problem of digital money. If there were any way the user of a cryptocurrency could spend their coins more than once, it would undermine the entire system. Said currency would lose its value.

This is a complicated problem, especially with online currencies that have no central authority, such as a bank or a government, to keep track of how much money each person has, how they’re spending it, and whom they’re paying.

The Bitcoin network was the first to solve this problem with proof-of-work. Proof-of-stake has emerged as a possible alternative that most researchers think is both more energy-efficient and more secure.

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What Is Proof of Stake (PoS)?

The Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to how many coins they hold. This means that the more coins owned by a miner, the more mining power they have.

How Does Proof of Stake Work? 

A blockchain contains servers that are referred to as “nodes.” Nodes process transactions that occur in a blockchain. Some nodes can add blocks of transactions to the chain, maintaining and growing the ledger.

For PoS, nodes commit funds to the network — a process known as “staking” — for a chance to be chosen as the next block writer, rather than miners competing with each other to be rewarded for solving cryptographic puzzles, as is the case with PoW (Proof of work).

In PoS networks, nodes that can add blocks are called “validators,” which are individuals who are responsible for verifying transactions on a blockchain. Each validator has a chance at being selected to write the next block and receive its rewards. 

It’s kind of like a lottery – the larger the stake of tokens committed, the higher odds that node has of being chosen. “The choice of the next block writer, the next validator, is a pseudo-random process that’s determined by the size of the stake that a user has dedicated to the network,” 

PoS can improve upon some of the biggest problems presented by PoW, namely:

  • Energy consumption: PoS requires less energy than PoW.
  • Transaction throughput: PoS networks can handle more transactions than PoW.
  • Scalability: PoS networks can scale more easily than PoW networks.

Which Cryptocurrencies Use Proof of Stake? 

A growing number of the most popular cryptocurrencies use some variation of the PoS protocol. Here are a few:

  • Cosmos (ATOM)
  • Cardano (ADA)
  • Polkadot (DOT)
  • Solana (SOL)
  • VeChain (VET)
  • Tezos (XTZ)

Note that some PoS tokens are entirely pre-mined,

Proof of Stake vs. Proof of Work 

Both PoS and PoW mechanisms achieve the same end goal, but through different means. 

The main difference between networks that use PoS and those that use PoW is how the network achieves consensus for its blockchain.

In proof-of-work, miners are effectively spending large amounts of computing power and electricity as they work on “solving a very hard cryptographic puzzle.” This approach has been criticized as requiring too much energy, having difficulty scaling or growing the network, and not providing enough throughput (the ability to process many transactions).

Proof-of-Stake and 51% Attacks

A 51% attack refers to an event where an individual or group attempts to gain control of a network by controlling the majority of hashing or staking power.

It’s unclear if PoS networks are more or less prone to 51% attacks than PoW networks. 

The subject is mostly theoretical, and 51% of attacks have rarely occurred in the real world.

When it comes to proof-of-stake, attackers would have to buy up more than half the number of tokens being staked. From there, the attacker could become the sole validator and control the network.

One theory is that this could be difficult to achieve because of how high it would drive the price of any particular token. The hope is that people would rather participate honestly in the system by staking tokens than go through the trouble of trying to attack the network, which could get expensive fast.

Finally,

Proof of Stake (PoS) is a consensus mechanism used to validate crypto transactions and is meant to improve upon perceived flaws of Bitcoin’s Proof of Work (PoW). Some of the largest and fastest-growing coins have implemented this protocol. 

Holders of PoS tokens can earn a “crypto dividend” on their holdings by staking their crypto and becoming network validators. Because this sometimes requires a substantial investment, exchanges have taken it upon themselves to make the process simpler and more affordable for the average user.

Understanding PoS is key to understanding cryptocurrency and how it works. In general, it’s always better to know what you’re investing in before getting involved.

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