In this blog, we are going to explore the Proof of Stake (PoS) condenses algorithm and how it works? and why does it matter?
Proof of stake (PoS) cryptocurrencies has been gaining in popularity over the past year, thanks to the rise of blockchain projects like Ethereum and NEO.
But what exactly is proof of stake, and why does it matter? In this article, we’ll answer these questions and more, so you can decide whether or not proof of stake is right for your investment portfolio.
What is Proof of Stake?
One of the mechanisms for obtaining distributed consensus in a cryptocurrency blockchain is the proof-of-stake method.
Whereas proof-of-work (PoW) based cryptocurrencies like bitcoin rely on miners using large amounts of computing power to solve algorithmically difficult problems in order to validate transactions.
PoS based cryptocurrencies depend on validators, called forgers, who have a set amount of cryptocurrency that they are willing to risk losing when validating a transaction.
Related Article: Chain Based Proof of Stake: Comprehensive Guide
How Proof of Stake Works?
Proof-of-stake (PoS) is a type of consensus algorithm by which a cryptocurrency blockchain network can maintain a distribution of identities on the blockchain, In PoS-based cryptocurrencies, stakers are rewarded for validating transactions.
Staking may also be referred to as forging, minting, or securing. In Proof-of-work (PoW) based cryptocurrencies, miners solve computational puzzles to validate transactions and create new blocks on the blockchain.
The first staker will receive newly created coins as a reward, The main difference between proof-of-stake (PoS) and proof-of-work (PoW) is that PoS systems do not require an incentivizing mechanism.
Instead, they use certain pre-selected nodes in order to validate transactions and add them to the blockchain.
This means that anyone who owns some tokens in a particular currency can participate in the validation.
Different Types of PoS Systems
The two main types of PoS are Delegated proof-of-stake (DPoS) and regular proof-of-stake.
There are two different kinds of DPoS coins: Those with completely centralized block validation (such as Lisk), and those that use decentralized voting to elect block producers but still rely on centralization in other aspects (such as Bitshares).
Both types of DPoS systems provide security against double-spending without requiring any participants to trust each other or any third-party processor.
One type of PoS system, called Casper, has been introduced by Ethereum, which hopes to switch from proof-of-work (PoW) to proof-of-stake.
Another common type is called Delegated Proof of Stake (DPoS), in which holders vote for delegates who then verify transactions.
There are also variations such as Cardano’s Ouroboros, which uses a different method to reach consensus.
Related Article: Secure Proof of Stake (SPoS): Revolutionary Consensus
Benefits of Proof of Stake
PoS systems differ from proof-of-work systems in that they don’t require a tremendous amount of computing power to process transactions.
Rather, they rely on a validator’s existing holdings in that particular cryptocurrency. So rather than spending all your money on mining equipment (as one might with bitcoin), you simply have to purchase some coins and hold onto them as part of your transaction validation.
This lowers barriers to entry for potential crypto-investors, making them more attractive as an alternative investment vehicle.
Many people believe that cryptocurrency with PoS will be more secure and have greater longevity than those with other consensus mechanisms.
An added benefit of a PoS coin is that you earn interest for simply holding your cryptocurrency, incentivizing you to contribute to its value growth over time.
Advantages of Proof of Stake
Proof-of-stake systems are a newer alternative to proof-of-work, so they haven’t been tested as widely.
However, they do have some interesting potential advantages over their competition.
For one thing, PoS could allow for quicker transactions between blocks because less computing power would be required.
Another advantage that some researchers suggest is that it may be harder to attack PoS blockchains by using a brute force attack.
PoS systems have gained popularity due to their ability to increase transaction speeds while also reducing energy consumption by more than half compared with Bitcoin’s PoW system.
Disadvantages of Proof of Stake
With PoS, owners of cryptocurrency aren’t incentivized to maintain a full node, which makes it more vulnerable to hackers or 51% attacks.
That’s where a group takes over more than half of all mining hash power in an attempt to fraudulently add new blocks.
Additionally, because you don’t need mining equipment to participate, there are no barriers to entry into PoS blockchains.
This means that even though many in crypto believe that decentralization will help prevent malicious behavior from bad actors, PoS systems are still subject to things like pump-and-dump schemes.
So, for example, if I owned a lot of a coin and started trying to manipulate its price by releasing false news about my project; unless your blockchain has any sort of governance mechanism set up, there would be nothing stopping me.
Different Proof of Stake Based Tokens
Many cryptocurrencies are based on proof-of-stake, including Peercoin, NXT, and Mastercoin.
PoS has recently been implemented by many new coins like QubitCoin, BlackCoin, and Myriad and List of Proof-of-Stake Based Coins:
Related Article: What is Tokenomics? – Guide on Crypto & Tokens
Criticisms of Proof of Stake
A PoS system requires that coin owners lock up their funds for a period of time before being allowed to participate in block validation.
In order to ensure that validators aren’t gaming (or creating multiple wallets to gain more control over) the system.
PoS systems often restrict staking to one type of wallet address, meaning users can only control one validator from each address.
This means they might need to lock up or split their coins into several addresses and be unable to spend them freely while doing so.
This makes PoS less appealing as an investment opportunity than other cryptocurrencies, like Bitcoin.
It also makes these currencies much less practical for everyday transactions; as soon as you move your tokens onto an exchange, sell them off at a profit, or deposit them into a PoS wallet, you lose your ability to validate new blocks on that blockchain.
Should You Invest in Proof of Stake Coins?
There are three main types of coins proof-of-work, proof-of-stake, and mixed systems.
Proof-of-work uses computational power in order to validate transactions while mixed systems use both a proof-of-work algorithm and another mechanism.
PoS works differently by giving every coin holder a chance to validate transactions based on how many coins they own.
So what’s so special about proof-of-stake? The answer lies in its potential for scalability.
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Future of Proof of Stake Consensus
There’s still a lot of debate around which PoS consensus mechanism will come out on top, but one thing is for sure proof-of-stake as a whole has never been more popular.
Developers are increasingly investing in PoS protocols as they continue to look for faster, more efficient ways to validate transactions.
While some coins have already implemented PoS, others are moving in that direction or considering making changes.
Why Ethereum use PoS Consensus?
PoS has recently become a popular alternative to proof-of-work (PoW) consensus, which requires miners to verify transactions using computer power.
PoS usually requires less energy consumption than PoW as a way to reduce transaction fees and improve scalability.
A few cryptocurrencies use PoS as their consensus method, including NXT, Bitshares X, PIVX, Stratis, and Peercoin.
The team behind Ethereum has also announced that they are developing their own PoS blockchain called Casper.
Now that you know about proof-of-stake, we’ll take a look at another type of consensus mechanism called proof-of-work.
Keep in mind that all blockchains use some type of consensus mechanism, but no two are exactly alike.
This discussion has shown how these different mechanisms help secure blockchains and how they may one day lead to better security models for many other types of systems across multiple industries.
Nitin is a professional data Engineer, Who has a Post Graduation in Data Science and Analytics and working in the healthcare sector. Experts in Data analysis, Machine learning, AI, blockchain, Data related tools, and technologies. He is the Co-founder and editor of analyticslearn.com