Proof of Stake

Updated on March 11, 2024
Article byWallstreetmojo Team
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Proof of Stake Meaning

Proof of stake (PoS) mining is a consensus mechanism that validates blocks and transactions to secure a cryptocurrency blockchain. In PoS, coin owners stake their coins to become a validator. Unlike the proof-of-work (PoW) system, where users compete for their chance to append the blockchain, validators are selected at random in PoS depending on the user’s stake.

The miners earn money by verifying and adding new blocks to the blockchain. When a minimum number of validators confirm a block, it is finalized and added to the chain. The PoS consensus system is more energy-efficient, does not require heavy hardware, and is generally less expensive than the PoW system.

Key Takeaways

  • Proof of Stake is a crypto mining system that rewards mining power to miners based on how many tokens they have. The validators stake a certain number of coins to gain the chance to verify transactions and earn a fee.
  • PoS cryptosystems require less computational power than Proof of work. They are more energy-efficient, needs less hardware, and costs less than Proof of work. They also reduce the possibility of cyber-attacks.
  • Many cryptocurrencies are now partially or wholly shifting to PoS due to its apparent benefits and added transparency.

How pos Work

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Proof of Stake Explained

Proof-of-stake mining was introduced to overcome the shortcomings of the Proof-of-work system. It allows the coin owner to pledge coins (staking) for a chance to validate the transactions and gain a transaction fee. Even though the PoS protocol picks the validator through a random selection process, the person with more coins automatically holds more mining power, i.e., People with more percentage of stake are more invested in the currency and are allocated more transactions. It protects users since it reduces the risk of the coin value going down fast. The chosen validator checks and adds blocks to earn rewards. If they supply inaccurate information, they may lose part of their stakes.

Since the transactions in crypto mining are distributed across peer-to-peer networks, individual computers or network owners can dedicate significant computing power for mining and earn a decent amount of money in the process. As a result, many individuals and firms have dedicated entire networks to crypto mining, intending to increase income.

Proof of work vs Proof of stake

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Advantages of PoS

The seemingly biggest difference between Proof of Work and Proof of stake is that PoS does not need much hardware to compute the transactions. For example, rather than having a network of 10 computers in a network mining day and night, one could amass a large amount of currency and then dedicate only three computers to do the mining. They could end up earning the same or even more while utilizing less bandwidth and using less software.

In PoS, the amount earned from each transaction is congruent with the amount of token a person holds. It encourages people to get more tokens so that each transaction results in a more significant gain. It also raises the value of the cryptocurrency, which persuades more people to invest in it. This self-repeating cycle maintains the value of the cryptocurrency at remarkably high levels even if some miners opt-out or sell a significant amount of their tokens. The stronger the value of the cryptocurrency, the more resilient it becomes to notable shifts in ownership.

Another advantage of PoS over PoW is that the latter requires a lot of computational power and thus takes up a lot of electrical energy. Miners are, therefore, forced to sell their coins to foot the energy bills and other operational costs. With PoS, since the percentage of cryptocurrency held by a person determines their mining power, they cannot mine as much as they want with less power. If they wanted to process more transactions, they would need to invest more. It creates better energy efficiency and reduces the chance of cyber-attacks. Proof-of-stake mining is also a simpler form of consensus than PoW i.e, it is easier to secure an entry and create new blocks.

Which Cryptocurrency Uses Proof of Stake?

Many cryptocurrencies currently use PoS to prevent fraud and create transparency in crypto mining. The first company to use this system was Peercoin in 2012. Other notable PoS cryptocurrencies are:

  • CryptoCoin
  • NXT
  • Tezos
  • ChangeNOW
  • DASH
  • PIVX
  • NEO
  • QTUM
  • PIVX
  • Reddcoin
  • Neblio
  • Cardano
  • Blackcoin
  • Algorand

Ethereum has recently declared that it will be switching to PoS from 2021 onwards. However, the shift is still in progress due to inherent technical obstacles.

Is It Secure?

A cryptocurrency system that utilizes PoS offers several security advantages. An example is the low risk of crypto value reduction when miners convert their currency into fiat money. Proof of stake cryptocurrency also helps to reduce network security attacks. In theory, to attack 51% of the system, a miner would need to have 51% of the currency. If it was possible to attain this much currency, it would be possible for the miner to create fake transactions from which they can benefit. They would need vast amounts of computation to do this, such as an extensive network of computers or database hubs. However, this would work against them as it would mean extra expenses. However, it is a perfect example of how proof of stake cryptocurrency can protect the entire system and, by extension, its other users and miners.

Proof of Stake is a concept that has proven to be effective in reducing the risk of fraud and holding up the value of cryptocurrency much better than other tried methods. Preservation of the currency’s value gives it credibility, and this, in turn, entices more users to use it.

However, certain drawbacks need to be addressed too. The PoS system is more centralized because the person holding more tokens is automatically given more chances to be selected. It leads to the concentration of power among a select few and reduces fair play. Even though the blockchain has never been hacked, nodes have been attacked multiple times, raising concerns among the users. A network can only achieve complete cyber prevention on vigilance 24/7, which poses a challenge to safety.

PoS is becoming popular and is increasing its uptake among crypto companies. Even companies that have been present for a long time and use the Proof of Work model have started shifting to the PoS system. Some, like Peercoin, combine the two methods for more benefits.

Frequently Asked Question (FAQs)

Is Proof of stake secure?

Even though the security in PoW is more scalable, the chance of a cyberattack is reduced in PoS. The 51% cyberattack is unlikely to occur in PoS as it is tough to own 51% of staked cryptocurrency. However, one cannot say with certainty that the PoS is a perfect system as there have been occasional attacks.

How does Proof of stake works?

The difference between Proof of Work and Proof of stake is that the former uses a competitive validation mechanism to verify transactions while the latter uses an algorithm. In PoS, coin owners stake a certain number of coins as collateral for gaining the right to validate transactions. The protocol chooses the validators based on several factors through a random selection process. Then, the selected validators check and confirm the blocks. Once a minimum number of validators verify a block, it is added to the blockchain.

Which crypto uses Proof of stakes?

Several cryptocurrencies utilize the PoS consensus, including Tezos, Atmos, NXT, crypto coin, etc. In addition, Etherum recently declared that they would be switching to PoS very soon.

This has been a guide to Proof of Stake and its meaning. Here we discuss how proof of stake works, which cryptocurrency uses PoS and their security issues. You can learn more about financing from the following articles –