What Is Proof-of-Stake (PoS)?

Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchainso the consensus mechanism secures the blockchain.

Show

Learn more about proof-of-stake and how it is different from proof-of-work. Additionally, find out the issues proof-of-stake is attempting to address within the cryptocurrency industry.

Key Takeaways

  • With proof-of-stake (POS), cryptocurrency owners validate block transactions based on the number of coins a validator stakes.
  • Proof-of-stake (POS) was created as an alternative to Proof-of-work (POW), the original consensus mechanism used to validate a blockchain and add new blocks.
  • Proof-of-stake (POS) is seen as less risky in terms of the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous.

Understanding Proof-of-Stake (PoS)

Proof-of-stake reduces the amount of computational work needed to verify blocks and transactions that keep the blockchain, and thus a cryptocurrency, secure. Proof-of-stake changes the way blocks are verified using the machines of coin owners. The owners offer their coins as collateral for the chance to validate blocks. Coin owners with staked coins become "validators."

Validators are then selected randomly to "mine," or validate the block. This system randomizes who gets to "mine" rather than using a competition-based mechanism like proof-of-work.

To become a validator, a coin owner must "stake" a specific amount of coins. For instance, Ethereum will require 32 ETH to be staked before a user can become a validator. Blocks are validated by more than one validator, and when a specific number of the validators verify that the block is accurate, it is finalized and closed.

Different proof-of-stake mechanisms may use different methods for validating blockswhen Ethereum transitions to PoS, it will use shards for transaction submissions. A validator will verify the transactions and add them to a shard block, which requires at least 128 validators to attest to. Once shards are validated and block created, two-thirds of the validators must agree that the transaction is valid, then the block is closed.

To summarize the Ethereum PoS process, you might say it is validation sharing across a cryptocurrency network instead of a validation competition.

Goals of Proof-of-Stake

Proof-of-stake is designed to reduce the scalability and environmental sustainability concerns 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 like electricity and rent with fiat currency. What's really happening then is that miners are exchanging energy for cryptocurrency. The amount of energy required to mine proof-of-work cryptocurrency profoundly affects the market dynamics of pricing and profitability. There are also environmental aspects to consider since PoW mining uses as much energy as a small country.

The PoS mechaism seeks to solve these problems by effectively substituting staking for computational power, whereby an individual's mining ability is randomized by the network. This means there should be a drastic reduction in energy consumption since miners can no longer rely on massive farms of single-purpose hardware to gain an advantage.

The first cryptocurrency to adopt the PoS method was Peercoin. Nxt, Blackcoin, and ShadowCoin soon followed suit.

Proof-of-Stake Security

Long touted as a threat for cryptocurrency fans, the 51% attack is a concern when PoS is used, but it is very unlikely. A 51% attack is when someone controls 51% of a cryptocurrency and uses that majority to alter the blockchain. In PoS, a group or individual would have to own 51% of the staked cryptocurrency.

It is not only very expensive to have 51% of the staked cryptocurrencystaked currency is collateral for the privilege to "mine." The miner(s) that attempt to revert a block through a 51% attack would lose all of their staked coins. This creates an incentive for miners to act in good faith for the benefit of the cryptocurrency and the network.

Most other security features of PoS are not advertised, as this might create an oportunity to circumvent security measures. However, most PoS systems have extra security features in place that add to the inherent security behind blockchains and the PoS mechanisms.

What Is Proof-of-Stake vs. Proof-of-Work?

Proof of Stake (POS) uses randomly selected miners to validate transactions. Proof of Work (POW) uses a competitive validation method to confirm transactions and add new blocks to the blockchain.

Is Proof-of-Stake a Certificate?

Proof-of-stake is a consensus mechanism where cryptocurrency validators share the task of validating transactions. There are currently no certificates issued.

How Do You Earn Proof-of-Stake?

Proof of Stake (POS) is a built-in consensus mechanism that is used by a cryptodurrency's network or validators. It cannot be earned, but you can help secure a network and earn rewards by using a cryptocurrency client that participates in PoS validating or becoming a validator.

Can Bitcoin Be Converted to Proof-of-Stake?

It's possible that Bitcoin will change to proof-of-stake. Etherum began its existence using PoW and is transitioning to PoS, but the process can take years to implement in an already established cryptocurrency.

Investing in cryptocurrencies and other Initial Coin Offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.