:max_bytes(150000):strip_icc()/Term-Definitions_Proof_Of_Stake_V1-2fe2af764d9c404e8c387224e4f69f60.jpg "What does Proof-of-Stake (PoS) mean in Crypto?")
What is Proof of Stake (PoS)?
Proof-of-stake is a blockchain consensus mechanism for processing transactions and creating new blocks. A consensus mechanism is a method of validating entries in a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchain – so the consensus mechanism secures the blockchain.
Learn more about proof-of-stake and how it differs from proof-of-work. Also, find out what issues proof-of-stake is trying to address within the cryptocurrency industry.
Key takeaways
Investopedia / Crea Taylor
Understanding Proof of Stake (PoS)
Proof of Stake reduces the computational work required to verify blocks and transactions. Under proof of work, rigid computing requirements kept the blockchain secure. Proof-of-stake changes the way blocks are verified with the machines of coin owners, so there’s not as much computer work to be done. The owners offer their coins as collateral – called staking – for the chance to validate blocks and earn rewards.
Validators are randomly selected to confirm transactions and validate block information. This system randomizes who can collect fees rather than using a competitive reward-based mechanism such as proof-of-work.
To become a validator, a coin owner must “stake” a specific amount of coins. For example, Ethereum requires 32 ETH to be deposited before a user can use a node. Blocks are validated by multiple validators, and when a specific number of validators verify that the block is accurate, it is finalized and locked.
To activate your own validator, you will need to deposit 32 ETH; however, you don’t need to stake that much ETH to participate in validation. You can join validation pools using “liquid staking” which uses an ERC-20 token that represents your ETH.
Different proof-of-play mechanisms may use various methods to reach a consensus. For example, when Ethereum introduces sharding, a validator will verify the transactions and add them to a shard block, requiring no more than 128 validators to form a voting “committee”. Once shards are validated and a block is created, two-thirds of the validators must agree that the transaction is valid, then the block is locked.
How does Proof-of-Stake differ from Proof-of-Work?
Both consensus mechanisms help blockchains synchronize data, validate information, and process transactions. Each method has been proven successful in maintaining a blockchain, although each has advantages and disadvantages. However, the two algorithms have very different approaches.
Under PoS, block creators are called validators. A validator checks transactions, verifies activity, votes on outcomes and maintains records. Under PoW, block creators are called miners. Miners work to solve a hashing problem to verify transactions. In return for solving it, they are rewarded with a coin.
To ‘buy in’ to the position of becoming a block creator, you must own enough coins or tokens to become a validator on a PoS blockchain. For PoW, miners must invest in processing equipment and incur hefty energy costs to power the machines that attempt to solve the calculations.
The equipment and energy costs under PoW mechanisms are expensive, which limits access to mining and strengthens the security of the blockchain. PoS blockchains reduce the amount of processing power required to validate block information and transactions. The mechanism also lowers network congestion and removes the reward-based incentive that PoW blockchains have.
Proof of Play Proof of Work Block creators are called validators Block creators are called miners. Participants must own coins or tokens to become validators. Participants must purchase equipment and energy to become a miner Energy efficient Not energy efficient Security by community control Robust security due to expensive upfront requirement Validators receive transaction fees as rewards Miners receive block rewards and fees
Objectives of Proof-of-Stake
Proof-of-stake is designed to reduce network congestion and address environmental sustainability issues surrounding the proof-of-work (PoW) protocol. Proof-of-work is a competitive approach to verifying transactions, which naturally encourages people to look for ways to gain an advantage, especially since monetary value is involved.
Bitcoin miners earn bitcoin by verifying transactions and blocks. However, they pay their operating expenses, such as electricity and rent, with fiat currency. So what really happens is that miners exchange energy for cryptocurrency, causing PoW mining to use as much energy as some small countries.
The PoS mechanism attempts to solve these problems by effectively substituting staking for computing power, whereby the network randomizes an individual’s mining ability. This means there should be a drastic reduction in energy consumption as miners can no longer rely on massive farms of single-purpose hardware to gain an advantage. For example, Ethereum’s transition from PoW to PoS reduced the blockchain’s energy consumption by 99.84%.
The first cryptocurrency to use the PoS method was Peercoin. Several others followed soon after, but Ethereum was the blockchain where it made the biggest impact.
Proof-of-stake security
The 51% attack, long touted as a threat to cryptocurrency fans, is a concern when using PoS, but it is doubtful that it will occur. Under PoW, a 51% attack occurs when an entity controls more than 50% of the miners in a network and uses that majority to alter the blockchain. In PoS, a group or individual will have to own 51% of the cryptocurrency.
It is very expensive to control 51% of the cryptocurrency. Under Ethereum’s PoS, if a 51% attack has occurred, the honest validators in the network can vote to disregard the altered blockchain and burn the offender(s) in play ETH. This incentivizes validators to act in good faith to benefit the cryptocurrency and the network.
Most other security features of PoS are not advertised as they may create an opportunity to bypass security measures. However, most PoS systems have extra security features in place that add to the inherent security behind blockchains and PoS mechanisms.
What is the difference between proof-of-stake and proof-of-work?
Proof-of-Stake (POS) uses randomly selected validators to confirm transactions and create new blocks. Proof-of-Work (POW) uses a competitive validation method to confirm transactions and add new blocks to the blockchain.
What is proof of play for dummies?
Proof-of-Stake is a consensus mechanism where distributed cryptocurrency validator programs share the task of validating transactions.
What are the disadvantages of proof-of-stake?
According to Proof of Stake (POS) consensus, users generally need to own a cryptocurrency before they can participate in consensus and earn more crypto. To host a full validator node on Ethereum, a user has to stake 32 ETH, which is very expensive. Another disadvantage of PoS is that on blockchains with smaller networks, a large minimum stake can lead to centralization.
Is Ethereum a PoS or PoW?
Ethereum uses proof-of-stake as its consensus mechanic. Full validator nodes require a stake of 32 ETH, but other participants can participate in consensus by delegating their ETH to a validator or participating in staking pools. Users can also deposit small amounts of ETH on their own, but no rewards are earned.
The Bottom Line
Proof-of-stake is a mechanism used to verify blockchain transactions. It differs significantly from proof-of-work, primarily in that it incentivizes honest behavior by rewarding those who put their crypto as collateral for a chance to earn more.
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