What is Proof of Stake (PoS)? – All you need to know 2022

Proof of Stake is considered an energy-efficient alternative to Proof of Work, as the validation is not linked to computing power but to the cryptocurrency units.

Proof of Stake (PoS) is a consensus mechanism or consensus algorithm on the blockchain.

PoS is considered an energy-efficient alternative to the proof-of-work algorithm, which is used in particular with Bitcoin. While Proof of Work (PoW) requires mining to mine new blocks, PoS couples the consensus to the units of the cryptocurrency visible and verifiable in the network.

In this article, you will get answers to the following questions:

  • What is Proof of Stake?
  • How does Proof of Stake work?
  • What are the most top proof of stake coins?
  • What does delegated proof of stake (dPos) mean?All
  • How does PoS differ from Proof of Work?

What is Proof of Stake?

PoS is an energy-efficient consensus algorithm of the blockchain.

In contrast to PoW, PoS does not require massive energy consumption through mining in order to generate new blocks. Instead, the consensus is secured in another way, in that the stake held in the crypto currency is used as the basis for validating the blocks.

In order to generate new blocks and thus maintain the blockchain, no additional hardware is necessary, nor do new blocks have to be mined using massive power consumption.

The validation is linked to the amount of ownership of the shares. The more shares a network participant has in a cryptocurrency, the higher the probability of creating a new block.

Therefore, the possibility of generating new blocks and thus receiving rewards correspond to mathematical probabilities. If a network participant has 5 percent of all coins in circulation, this participant has a 5 percent probability of validating a new block.

Since PoS does not require mining or prospecting, the network participants are not referred to as miners but rather forgers or validators. Blocks are not mined or mined but forged.

The incentive to generate new blocks is not linked to a direct reward system, as is the case with PoW, in which miners receive a reward for each new block. Instead, validators receive the transaction fees incurred per block as a reward.

How does Proof of Stake work?

PoS is used to create a consensus on the blockchain and thereby maintain the blockchain.

Finding consensus is necessary because the blockchain, as a distributed ledger category, is a decentralized network that has no central authority to manage or organize the blockchain. For this reason, the participants must ensure a consensus that validates the correctness of the data on the blockchain. All participants have equal rights in this process.

Having a consensus on the blockchain means that the network participants agree on which values ​​are to be assigned to which participant at what point in time.

Like PoW, PoS is a protocol that provides such a consensus mechanism. The aim here is for the network participants to accept, promote and implement the specified protocol out of self-interest. This self-interest is promoted through various incentives.

The proof-of-stake process works as follows:

  • The flow of data or information on the blockchain takes place via transactions.

  • These transactions must be legitimized or validated to ensure the correctness of the transactions and data.

  • The validation is carried out by computers (nodes) in the network by performing specific tests or arithmetic tasks. Validated transactions are summarized in blocks and immutably attached to the blockchain.

  • This is where PoS comes in as a mechanism for the decision-making process according to which criteria the next block is allocated or selected. At the same time, an artificial limitation of the time span between the blocks is created.

  • At PoW, new blocks are mined through computing power. With PoS, on the other hand, the shares held in the cryptocurrency are used as the basis for validating the blocks.

  • There are two different PoS approaches: the chain-based approach and the Byzantian Fault Tolerance approach. The former selects a validator randomly during each time window and assigns it the right to create a new block. The latter also selects validators at random. However, the selected validator only has the right to suggest blocks. But the agreement as to which block is correct takes place through a multi-stage process in which each validator sends a kind of vote for a specific block. At the end of this process, all validators constantly vote on whether a particular block is part of the blockchain or not.

In Proof of Stake, incentives are not only promoted by a reward system in which each validator receives the transaction fees incurred per block. PoS also binds validators to the system via the reliability of how they form blocks.

Every validator is interested in the security of the blockchain to protect the value of their own part in it.

If validators were to validate unlawful transactions, their own shares, which are deposited as a kind of “pledge”, would lose value or be completely lost. This is because incorrect validation damages the system as a whole.

Because the allocation of the block to be validated depends not only on the amount of one’s share but also on the random algorithm, no validator can predict who will receive validation and when. This is also a disadvantage of the PoS approach since the system has a kind of “lottery character”. Allocation can only occur if there are sufficiently large shares in the cryptocurrency. This increases the risk of monopolies or oligopolies.

Proof of Stake (PoS) vs. Delegated Proof of Stake (dPoS)

In the Delegated Proof of Stake (dPoS), delegates (witnesses) are elected from among the network participants who take on specific tasks.

These tasks include validating a block, adjusting the consensus, or paying rewards. Delegates are elected but can also be voted out at any time.

The so-called randomized proof of stake is an extension of the dPoS system. Here a committee is determined that fulfills certain tasks. A random algorithm determines the members of the committee.

Both systems are additions to the PoS approach to compensate for its disadvantages and ensure greater willingness to participate in the system.

5 Top Proof of Stake coins

Proof of Stake is the underlying protocol for various coins. The best known are described below.

Binance Coin (BNB)

The Binance Coin (BNB) belongs to the Binance crypto exchange and was built on the Ethereum blockchain.

BNB aims to promote the exchange and offer users coins at comparatively low prices. BNB can be traded on Binance and other crypto exchanges. The fees are comparatively low. In addition, investors can create BNB, i.e. staking, since BNB is based on a modified form of the dPoS.

A Proof of Staked Authority has been introduced at Binance for this purpose, which allows stakers to choose the blockchain validators every 24 hours. They are responsible for the correct execution of the smart contracts and receive BNB as a reward.

Solana (SOL)

Solana is a blockchain project that uses PoS. The internal cryptocurrency is called SOL.

The platform can be compared to Ethereum because both blockchains can interact with smart contracts. The consensus mechanism is a combination of PoS and Proof of History. The latter is used to prove that an event took place at a certain point in time.

Cardano (ADA)

Cardano is an open-source blockchain. Users can create smart contracts and develop decentralized applications ( dApps ).

The consensus is reached via PoS. This allows users to build a passive income.

Polkadot (DOT)

Polkadot is a relatively young blockchain project and was only founded in 2020 to establish a platform for blockchain networks such as Ethereum.

Polkadot works with dApps that manage transactions and send them to the blockchain for permanent validation. The underlying mechanism is PoS, so users must stake or lure (lock) their assets in order to participate.

Polkadot’s PoS system differs from other PoS approaches in that it distinguishes between validator and nominator. Validators validate blocks and nominators vote on who can validate the blocks.

Avalanche (AVAX)

Avalanche is a smart contract platform that enables fast and cheap transactions.

The platform was founded at the end of 2020 with the aim of not only being decentralized and secure but also scalable. The lack of scalability is one of the primary challenges of blockchain systems, so systems like Bitcoin and Ethereum are comparatively slow and expensive.

Avalanche relies on PoS in order to be able to run without high computing power and with much less energy.

Proof of Stake vs. Proof of Work

Like Proof of Stake, Proof of Work is a consensus algorithm.

At PoW, the network participants solve a complicated cryptographic task and receive cryptocurrency as a reward. This process is known as mining. Solving the task proves that the calculation path, i.e. the transaction, does not have any errors and therefore shows correct data.

This requires a lot of time and energy, making PoW a very cost-intensive algorithm.

The arithmetic tasks are also becoming increasingly complex, increasing time and energy expenditure even further.

In contrast to this, at PoS, cryptocurrency is not created by mining, i.e. by solving tasks. Instead, small portions of the cryptocurrency are kept (pegged) in a wallet and blocked by the process. Each participant can validate transactions with all of the shares. The reward paid for this process can be compared to conventional interest.

Conclusion

Proof of Stake is an energy-efficient alternative to Proof of Work.

The probability of finding a block is not determined by computing power but by the proportion of the total amount of cryptocurrency within the network.

Frequently asked questions (FAQ) about Proof of Stake (PoS)

In this section, we provide answers to the most important questions about Proof of Stake (PoS).

What does staking mean in Proof of Stake?

With staking, crypto owners use their coins to add new blocks to the blockchain. In return, they receive rewards.

Does Proof of Stake use a lot of energy?

PoS consumes less energy than PoW because less computing power is required to maintain the blockchain.

What are the advantages of Proof of Stake?

PoS is simpler, cheaper and more resource-efficient than PoW. Users also can build a passive income through staking.

What are the disadvantages of Proof of Stake?

PoS prefers those network participants who own a large amount of cryptocurrency. This increases the risk of monopolies or oligopolies.

Is Proof of Stake Safe?

PoS is certified as being more secure because the algorithm penalizes participants who try to attach manipulated transactions to the blockchain. Anyone who submits a wrong validation will be recognized as a fraud and lose part of their crypto values ​​and the right to participate in further validations in the future.

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