What Is Proof of Stake (PoS)?

How Proof of Stake Works

Proof of stake is a cryptocurrency consensus mechanism where the mining and security of the network are determined by the accounts with the biggest stakes in the network. The concept was introduced by Sunny King and Scott Nadal in a 2012 whitepaper for PPCoin.

Unlike other consensus protocols such as proof of work, where power-hungry computers worldwide compete to validate the next group of transactions, known as a block.

With proof of stake, computers work together to decide which node (computer) validates the next block. Network members with a certain stake in the cryptocurrency are randomly chosen to create new blocks and validate new transactions. These members are then rewarded for their work.

Those with a larger stake—a larger amount of the currency held in a wallet—have higher chances of being selected to validate a block and earn the transaction fee.

Proof of stake has further evolved into models where those with small amounts of cryptocurrencies can pool them through a stake pool to earn rewards, or where transaction fees may be split among validators using a different methodology.

While proof of stake offers several major benefits over the more popular proof of work method, the three most noteworthy benefits are faster transactions, lower costs, and lower energy use.

This is very unlikely with large currencies such as ethereum, where it would require a lot of money to pull off, and is a bigger risk with smaller, more concentrated currencies.

While mining cryptocurrency tokens is rewarded and incentivized, the proof of stake system also disincentivizes bad behavior by way of slashing stake, ejection from the network, and other penalties.

Proof of Stake (PoS) Vs. Proof of Work (PoW)

Proof of stake and proof of work are two most popular consensus protocols among blockchains to verify data and maintain their infrastructure. As mentioned above, in a proof of stake protocol, members of the network, randomly select other members who own a stake in the cryptocurrency to verify transactions.

This is different from proof of work, the consensus mechanism used by bitcoin. With proof of work, computers known as miners compete to create new blocks and earn mining fees. With proof of stake, there is no competition.

Since there is no competition in proof of stake, less computational resources are used, bringing down energy usage. the bitcoin network has often been criticized for its massive energy consumption, while other cryptocurrencies tout themselves as more energy-efficient thanks to PoS.

Cryptocurrencies Using Proof of Stake

Networks using proof of stake are easy to find among the cryptocurrency landscape. Here’s a list of several popular platforms using a proof of stake validation method:

• Cardano
• Algorand
• Nxt
• Cosmos
• ThorChain

Pros and Cons of Proof of Stake

Pros Explained

• Fast transaction times: Compared to competitive proof of work currencies, proof of stake offers fast transaction times and supports higher transaction volumes.
• Low network fees: Proof of stake currencies typically charge very low fees due to the efficient network validation method.
• Energy efficient: Fewer computers and less competition mean proof of stake coins require relatively little energy to maintain.

Cons Explained

• Security risk: With fewer computers in control of the network, there are added security risks. Notably, if someone controls 51% or more of a cryptocurrency, they get effective control over the entire network.

Alternatives to Proof of Stake

Proof of stake looks to be a popular consensus and validation method going forward, but it isn’t the only choice. Here are other types of blockchain validation to know about, and some of them have evolved from proof of stake:

• Proof of work: The method behind Bitcoin, proof of work relies on miners competing to create the next block and earn a reward.
• Delegated proof of stake: With this variation of proof of stake, users who stake their coins can vote on the number of delegates to create a new block. EOS and Cardano are examples of delegated proof of stake currencies.
• Proof of authority: Blockchains using proof of authority rely on specific nodes, known as authorities, with specific permission to validate and create new blocks.
• Proof of burn: To participate in mining in a proof of burn network, new participants must “burn” (a term for sending to a wallet where the coins are not retrievable, effectively destroying them). The more currency an account burns, the higher the likelihood of being selected to validate the next block and earn a reward. Slimcoin uses the proof of burn method.
• Proof of capacity: With proof of capacity, nodes with the most available hard drive space dedicated to the project are in the best position to validate the next block and earn rewards. The Signum currency uses this validation method.
• Proof of elapsed time: Proof of elapsed time relies on miners similar to proof of work, but uses a trusted system to reduce competition and energy use. Intel developed this method. The Sawtooth Hyperledger coin relies on proof of elapsed time.

What It Means for Individual Investors

For individual investors, proof of stake cryptocurrencies offer a lower cost and more efficient method to buy, sell, and trade currencies. That makes them more useful for everyday transactions than currencies that rely on proof of work.

Given that proof of stake requires less computational power compared to proof of work, it reduces the environmental impact of transactions on that network. That can be a factor impacting investors, especially since there have been questions about bitcoin’s energy consumption and environmental impact.

Users on certain delegated proof of stake chains can stake small amounts of the cryptocurrency in their wallets to earn rewards for creation of new blocks or transaction validations.

For those who plan to acquire cryptocurrency through mining, proof of stake protocol offers a reprieve from expensive mining-only computer equipment.