What is Proof of Stake and how does it work?

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7 min read

In the world of cryptocurrencies it is common to hear about the two most used mining algorithms, Proof of Work (PoW) and Proof of Stake (PoS). In this article we will tell you all about the latter so you can understand how it works.

Proof of Stake is the main alternative to the Proof of Work algorithm. Its main objective is to replace it by providing better security and scalability to the networks that include it in their operation.

It is currently one of the most widely used consensus protocols in the world of cryptocurrencies and blockchain technology. Its job is to achieve consensus among all parties in a network. In the case of PoS, the nodes are known as validators. 

The validator nodes are chosen by the network randomly although nodes can increase their probability of being chosen. This is due to some criteria that offer more opportunities such as the amount of reserved coins the node has or the time of participation in the network.

 

Origin of Proof of Stake

The first time the concept of Proof of Stake appeared was in 2012, specifically in a paper by Sunny King and Scott Nadal. Its main idea and the reason for its creation was to solve the problem of high energy consumption caused by Bitcoin mining, especially by the Proof of Work protocol.

By the time Proof of Stake was created, the average cost of electricity per day to maintain the Bitcoin network was about $150,000 per day; today this figure has risen into the millions. As the power needed to mine Bitcoin increased, Sunny and Scott sought a new method to keep the network running without using a large amount of energy. 

This new method was called “staking” and is based on a deterministic algorithm that chooses nodes based on the number of coins owned by a user. This algorithm offered the possibility for nodes to increase their chances of being elected and maintaining the network, all in exchange for a reward for their work.

UOne of the pioneering projects in this new mechanism was Peercoin. However, this project did not rely entirely on the Proof of Stake, but created a hybrid algorithm between Proof of Work and Proof of Stake. Through this mechanism, the cryptocurrency managed to reduce energy consumption and at the same time increase the speed of transactions.

PoS has a lower complexity of mathematical problems compared to PoW. This means that it needs less power to perform calculations constantly and therefore expends fewer resources. Peercoin was just the beginning of the avalanche of projects added to the novelty of PoS. It is currently one of the two most widely used mechanisms.

We can also find the Proof of Stake implemented in projects such as Dash or Zcash.

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How does Proof of Stake work?

When this new mechanism appeared, it was quite novel, since all its operation is based on encouraging users to keep a certain amount of cryptocurrencies in the wallet at all times. Keeping these cryptocurrencies locked helps participants to increase their chances of being elected, since this is one of the main criteria established for participation.

Once these criteria have been established, the node selection process begins, which is carried out randomly. When the nodes are chosen and the selection process is finished, they are ready to validate transactions or create new blocks. 


As we have seen, the PoS process is distinctly different from the PoW validation process. PoW focuses on an endless process of solving puzzles of great difficulty. Proof of Stake, on the other hand, eliminates this arduous process and replaces it with one that avoids excessive use of electrical power. This leads to a large number of projects interested in implementing this protocol.

In addition to the most outstanding feature, which is the care of the environment, PoS guarantees the care of the network through incentives to its members, so that each one ensures the maintenance and protection of the network. Any user can participate in the network as long as they meet the participation quota. This is the number of cryptocurrencies that we must have blocked (in staking) to participate.

The orchestration offered by PoS encourages decentralization and increases security by preventing 51% or other types of attacks. The scalability it offers to the network is one of its main features, as it does not employ any time-consuming computational processes. It is therefore perfect for small payments and transactions. This is because hundreds of transactions can be verified per second.

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Advantages and disadvantages of Proof of Stake

Like any system, Proof of Stake has its own advantages and disadvantages. The following are the most important ones:


Advantages:

  • It is more environmentally friendly. As we already know, Proof of Work is not the best algorithm to protect the environment. This is why Proof of Stake came to solve the problem, as it does not require large amounts of electrical energy to operate. 
  • A noteworthy feature of this algorithm is that any user who has lent their funds to the network can instantly transfer, sell or buy their collateral equivalent to the previously lent funds to validate transactions. 
  • All users of the PoS network will receive the same reward regardless of the investment made by the user. Clearly the more coins we freeze the higher the final reward, but the percentage of profit remains uniform for all users. 
  • No advanced computer equipment is required to obtain rewards.

Disadvantages: 

  • Anyone can gain access. Since all that is needed to access the network are cryptocurrencies, any government could take control of most currencies. 
  • Coins must be constantly connected to the network which opens up loopholes for theft of funds, although it doesn’t have to happen, there are simply more possibilities than in PoW. 
  • It is more difficult to maintain anonymity, since the funds protecting the network are associated with an IP address.