Proof Of Stake (PoS) - Explained

December 8, 2021 (2y ago)

Proof Of Stake (PoS)

Only a small percentage of those who are interested in cryptocurrency are aware of its algorithms.

I was also interested in learning more about the algorithms behind various crypto coins. I’ll explain some of my knowledge about that. But this time I'm not going to explain those coins at all. I'll just share a few examples that are relevant to the theme of my post.

I'm going to discuss one of its algorithms, known as Proof of Stake (PoS)

First of all, we need to know what it is.

What is proof-of-stake (PoS)?

Proof Of Stake (PoS)

Due to the fact that cryptocurrencies are decentralized and not regulated by financial institutions, they require a means of verifying transactions. Proof of stake is a technique that several cryptocurrencies employ (PoS).

Proof of stake is a consensus mechanism for cryptocurrencies that is used to validate transactions. With this approach, cryptocurrency owners can stake their coins, granting them the authority to verify and add new blocks of transactions to the blockchain.

This method is a complement to proof of work, the original consensus mechanism for cryptocurrencies. Because proof of stake is far more energy efficient, it has grown in popularity as attention has shifted to the environmental impact of crypto mining.

Understanding proof of stake is critical for bitcoin investors. This article will explain how it works, its advantages and disadvantages, and examples of cryptocurrencies that utilize it.

How does proof of stake work?

Proof Of Stake (PoS)

The proof-of-stake approach enables cryptocurrency owners to stake their currencies and establish their own validator nodes. Staking is the act of pledging your coins to be used for transaction verification. While you are staking your coins, they are locked, but you can unstake them if you wish to exchange them.

When a block of transactions is ready to be processed, the proof-of-stake mechanism for the cryptocurrency selects a validator node to review the block. The validator verifies the accuracy of the transactions contained in the block. If they do, they add the block to the blockchain and receive cryptocurrency compensation for their efforts. However, if a validator proposes to add a block that contains incorrect information, they will forfeit some of their staked holdings as a penalty.

Consider how this works with Cardano (ADA), a popular cryptocurrency that utilizes proof of stake.

Anyone who possesses Cardano has the option of staking it and establishing their own validator node. When Cardano's Ouroboros protocol has to verify a block of transactions, it selects a validator. The validator verifies the block, adds it, and is compensated with additional Cardano.

Mining power in proof of stake

Proof Of Stake (PoS)

Mining power in proof of stake is proportional to the amount of coins staked by a validator. Participants who stake a greater number of coins have a greater chance of being chosen to add additional blocks.

Each proof-of-stake protocol employs a unique method for selecting validators. There is typically some degree of randomization involved, and the selection process can also be influenced by other factors like as the duration of validators' stakes.

Although anybody staking cryptocurrency has a chance of being picked as a validator, the odds are extremely slim if you're staking a tiny amount. If your coins represent 0.001% of the total staked amount, your chances of getting picked as a validator are approximately 0.001%.

That is why the majority of participants become members of staking pools. The owner of the staking pool establishes the validator node, and a group of users pool their funds in order to increase their chances of obtaining fresh blocks. The pool's participants share the rewards. Additionally, the pool owner may charge a nominal fee.

Proof-of-stake coins examples:

The following are some popular proof-of-stake cryptocurrencies:

  • TRON is a decentralized, open-source blockchain-based operating system with smart contract features, a consensus process based on proof-of-stake, and a native coin called Tronix (TRX).
  • Cardano (ADA): Cardano is a research-driven blockchain platform that prioritizes security and sustainability.
  • Tezos (XTZ) is a programmable blockchain designed with an on-chain upgrade mechanism for adaptability.
  • Algorand (ALGO) uses a two-tier blockchain structure to offer processing speeds of 1,000 transactions per second.

Proof of stake advantages both the cryptocurrencies that employ it and their investors due to the way it works. Proof of stake cryptocurrencies are able to execute transactions quickly and cheaply, which is critical for scalability. Investors can stake their cryptocurrency to earn rewards, generating a passive income stream. Additionally, the fact that proof of stake is an environmentally friendly consensus process indicates that it will likely continue to gain popularity as a consensus mechanism.