Proof of Stake is the second most popular method used for verifying cryptocurrency transactions, only behind Proof of Work.
It offers a number of advantages compared with the eldest Proof of Work consensus algorithm.
The top 2 of them is that Proof of Stake is much faster and at the same time consumes less energy.
Those are also the major reasons why the second biggest cryptocurrency out there, Ethereum, decided to switch from Proof of Work into Proof of Stake.
Ethereum is not the only crypto coin using it since there are a plethora of other cryptocurrencies like Cardano, Solana and Polkadot and many others.
By reading this post you will understand step by step how does Proof of Stake work.
A short description of that could be:
Proof of Stake is a consensus mechanism used by many cryptocurrencies in which only one person is chosen to be in charge and validate crypto transactions and if something goes wrong he will end up losing a proportion of his staked crypto.
As a result, in order for someone to be chosen as a validator is a prerequisite to stake crypto.
If you are not familiar with the term “crypto staking” it is recommended to click here and read everything you need to know about it.
So, let’s continue by taking a deeper look at the hot question;
How does Proof of Stake work?
Proof of stake is a cryptocurrency consensus model which is used for two purposes:
- For processing and validating transactions taking place inside a specific cryptocurrency environment
- Creating new blocks in a blockchain
Those two are the backbone of every cryptocurrency out there since without the first no one is able to complete transactions and without the second it will not be feasible for new coins to be created.
This task is undertaken by a person who is called a validator.
In contrast with the Proof of Work mechanism (which is the first and most renowned consensus mechanism), in the Proof of Stake mechanism it is chosen for each task that needs to be done, just one validator.
In the case of Proof of Work everyone is competing to become a validator, meaning that in order for a task to be done there is so much more energy consumption.
If you want to take a more thorough look at what is Proof of Work consensus protocol click here
In order for someone to become a validator in Proof of Stake process there is a prerequisite for him to stake crypto.
Crypto staking is a process in which an investor locks his money into a cryptocurrency for a specific period of time in exchange for future rewards.
If you are curious to learn more about it click here.
If a validator fails to validate the block then he is getting punished by losing coins that he had locked up for the Proof of Stake process.
How a validator is getting picked?
It depends on the coin that we are talking about.
Some crypto’s major factor is the total coins staked by an investor.
Others take into consideration the period of time that each investor has been staking, while there are some cryptos that choose random their validator in order to give everyone a fair shot.
Actually most cryptocurrency models use a combination of these.
All you gotta do to learn about what a specific coin requires is to search into its white paper.
Fact check mechanism
Finally, there is a fact check mechanism that is used to provide extra reliability in the whole process.
This mechanism is used to check if the validator is cheating.
For example someone might try to give himself free coins or he might make a fake transaction.
If that turned out to be true he automatically loses his staked crypto.
And this is actually the purpose of staking in the first place.
Who can participate in the fact check mechanism?
Anyone that meets the criteria to become a validator can check if a validator does his validation right or wrong.
So if he found out that something is wrong then he has the right to report it and the validator encounters the danger of losing all his staked assets.
Is Proof of Stake better than Proof of Work?
The above is an interesting question that needs to be answered in order to understand in which occasions is Proof of Stake better and in which comes short.
The major advantages of Proof of Stake are:
- Its architecture speeds up the time needed for a transaction to be done and offers more scalability
- Is planet friendly since it has a much smaller environmental impact
- Offers lower cost per transaction
In the other side of the (crypto)coin, Proof of Stake:
- Has not proven already that runs without problems at large scale
- Has a tendency towards centralization
- Might not be as secure resistant as Proof of Work is
If you take a step behind and take a look at the big picture it looks like Proof of Stake is better than Proof of Work.
And how could not be, since Proof of Stake was in position to see and study Proof of Work’s problems and configure solutions to those projects.
With all that being said, the switching decision that Ethereum took seems to make a lot of sense.
Conclusion
It is very important for everyone that intends to invest in the cryptocurrency market to study and understand how that consensus algorithm works.
And that’s why Proof of Stake is already here offering great advantages against its competitor and in addition looks like it has a bright future in front of it.
IMAGE SOURCE: Marco Verch
