Proof-of-stake is a cryptocurrency consensus mechanism that verifies transactions and creates new blocks in a blockchain. A distributed database, like the one used for cryptocurrency, needs a security measure to ensure all entries are valid. This process of verification is called a consensus mechanism—in this case securing the blockchain.
If you want to know more about how proof-of-stake works and what distinguishes it from proof-of-work, read on. This article will also introduce the problems that proof-of=state is trying to solve within the cryptocurrency world.
Proof-of-stake reduces the computational work needed to verify blockchain blocks and transactions, making it more secure. With proof-of-stake, block verification is done by coin owners who stake their coins as collateral. These owners become “validators.”
The block is validated by validators, which are randomly chosen to “mine” or validate the block. This method randomizes who gets to “mine,” rather than using a competition-based approach like proof-of-work.
A coin’s owner must “stake” a specific amount of coins in order to become a validator. For example, in the case of Ethereum, 32 ETH must be staked before a user can act as a validator.
Blocks are cross-checked by numerous validators, and once a certain number of these verifiers confirm that the block is correct, it cannot be edited and is set in stone.
Different proof-of-stake algorithms may use various verification approaches for blocks—when Ethereum switches to PoS, it will utilize shards for transaction submission. A validator must check the transactions and add them to a shard block, which needs at least 128 affirmation from other validators.
After shards have been validated and a block has been produced, two-thirds of the validators must confirm that the transaction is genuine before the block can be sealed.
Although both consensus mechanisms are useful in data synchronization, information validation, and transaction processing for blockchains, each one has its own advantages and disadvantages. What’s more, the two algorithms have entirely different approaches.
PoS block creators are called validators. A validator’s responsibilities include checking transactions, verifying activity, voting on outcomes, and maintaining records. Under PoW, the creators are called miners. Miners earn rewards for solving complex mathematical problems to verify transactions; in return.
Investors who want to “buy into” the idea of becoming a block creator only need to buy enough coins or tokens to become a validator for a PoS blockchain. Miners must spend money on processing technology and suffer high energy expenses in order to power the machines attempting to solve computations in a PoW network.
PoW blockchains are often expensive and difficult to access, which bolsters the security of the blockchain but weaken’s its scalability. Meanwhile, PoS blockchains tend to be more energy-efficient and therefore able to handle a larger capacity.
Proof-of-stake is an attempt to improve upon the proof-of-work protocol by reducing scalability concerns and making it more sustainable. Proof of work itself is a competition among users to verify transactions, with incentive coming in the form of monetary reward.
By validating transactions and blocks, Bitcoin miners earn the cryptocurrency. However, rather than using Bitcoin to pay for their operational costs such as electricity and rent, they use fiat currency instead. So in essence, what’s occurring is that miners are exchanging energy for cryptocurrency. The amount of energy needed to mine PoW cryptocurrency greatly affects the market dynamics related to pricing and profitability. There are also environmental implications since proof-of-work mining requires as much power as a small nation does #annualy!
The PoS mechanism searches for a solution to these problems by replacing staking with computational power, so that an individual’s mining ability is chosen randomly by the network. If this happens, there would be significantly less energy consumed because miners can’t depend on having many farms of hardware made solely for mining.
The 51% attack, often feared by cryptocurrency users, is when someone takes control of 51% of a currency and changes the blockchain. In PoS systems, this would happen if one entity owns51% of all staked cryptocurrency. However, this scenario is highly unlikely.
Not only does it cost a lot of cryptocurrency to have the majority stake–staked currency is used as collateral for the miners that “mine” the blocks. The miner(s) that try to revert a block through a 51% attack stand to lose all their staked coins. So, there’s an incentive for miners act in good faith and work for the benefit of both cryptocurrency and network.
Although publicizing all security features might provide an opportunity for someone to exploit a weakness, most PoS systems have additional Fort Knox-esque security measures. These extra precautions build on the already strong foundation of blockchains andPoS mechanisms.