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Proof of Stake – A Short and Simple Explanation

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In this article, we will quickly learn about Proof of Stake, but first, let us understand what we mean by “consensus mechanism”.

A consensus mechanism is a system that allows all the computers in a blockchain network to agree on which transactions are valid. So far, crypto favors Proof of Work and Proof of Stake consensus mechanisms.

What is Proof of Stake(PoS)

proof of stake
proof of stake

This is a way of confirming transactions and adding new blocks to the blockchain. In this system, owners of a particular cryptocurrency must temporarily deposit their crypto coin, in exchange for the rights to validate transactions on the blockchain. These coins can be reclaimed anytime the owner wishes.

Now, you must know that cryptocurrency does not have a central controlling authority like a central bank or an admin to regulate the system, therefore, a consensus mechanism like Proof of Stake is one of the ways to keep the system secure, the other popular method is Proof of Work consensus, used by Bitcoin and Ethereum

Proof of Stake has largely been talked about as an alternative to Proof of Work, which unlike proof of stake, requires a high amount of energy for its operations. Also as talks about cryptocurrency mining and its effects on the planet are gaining more attention, Proof of Stake is gaining more attention and usage.

Below, we will talk about how the proof of stake mechanism works, its advantages and disadvantages, and also a list of some of the cryptocurrencies using it.

How does Proof of Stake function?

This system is similar to the proof of work, in that a validator is chosen to validate a block of transaction and update the blockchain, after which they earn some crypto as a reward.

When a user initiates a transaction on the blockchain the transactions are compiled into a block, one block could contain as many as 500 – 4,000 transactions, when the block of transactions is ready to be processed in the blockchain, the proof of stake protocol chooses the computer node that will validate and process the block.

The validator who ends up validating the block on the network must meet certain requirements which include:

  1. Validator must temporarily deposit or stake a certain amount of the required cryptocurrency.
  2. To increase the probability of being chosen, the validator must have staked a specific amount of the currency.(ETH2 requires about 32 ETH minimum deposit)
  3. Also, to eliminate the wealthiest staking nodes always getting most of the transaction, the staking protocol also considers the lenght of time the coins have been staked, and then chooses among the validators in random order

The staked coins act also as a form of insurance against bad behavior, for instance, a validator can lose his staked coin to a process known as slashing. This is when a user loses some of his staked coin for failing to validate or validate a bad block of transactions.

In proof of stake, the selection is based on coin ownership; therefore, staking services are offered by different crypto exchanges which allow validators to stake crypto on their behalf in exchange for rewards. Multiple validators can join a staking pool to combine their computing power and increase their chances of being rewarded. Examples of exchanges that offer this service are Coinbase and Binance.

Advantages

advantages
advantages
  1. Energy efficient. proof of stake requires very little energy to validate and secure the blockchain.
  2. Faster transaction speed as it does not need to solve complex mathematical problems like the proof of work consensus mechanism.
  3. Affordable method of processing transactions as you only need to purchase the coins to become a participant. If you do not have enough coins to stake, you can join staking pools.
  4. Does not require expensive machines to participate.
  5. Without huge energy consumptions, it is impossible to identify and stop inviduals who participate in the proof of stake mechanism.
  6. Due to its affordable nature, staking encourages decentralization, which in turn, promotes and sustains cryptocurrency.

Disadvantages

disadvantages
disadvantages
  1. It has not been tested and proven enough to be reliable like its counterpart, proof of work.
  2. Validators with large holdings can have excessive influence on the ecosystem.
  3. This method encourages the hoarding of coins which can lead to centralization.
  4. Any validator with enough resources to purchase over 50% total cryptocurrency of a network using PoS consensus mechanism can carry out a 51% attack on the network.

Which Cryptos Use Proof of Stake

Below is a list of crypto that uses the proof of stake consensus mechanism:

Conclusion

Proof of Stake has been seen as a solution to the most of the problems presented by the Proof of Work consensus mechanism, however, there are a few concerns as to if it can live up to expectations and bring to the table the security and trust the proof of work has brought to the blockchain ecosystem. So far, it has done its job well.

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