What Does Proof-of-Stake (PoS) Mean in Crypto?

What Is Proof-of-Stake (PoS)?

Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. In the case of cryptocurrency, the database is called a blockchain—so the consensus mechanism secures the blockchain.

Learn more about proof-of-stake and how it is different from proof-of-work. Additionally, find out the issues proof-of-stake attempts to address within the cryptocurrency industry.

Key Takeaways

• With proof-of-stake (POS), cryptocurrency owners validate block transactions based on the number of staked coins.
• Proof-of-stake (POS) was created as an alternative to Proof-of-work (POW), the original consensus mechanism used to validate a blockchain and add new blocks.
• While PoW mechanisms require miners to solve cryptographic puzzles, PoS mechanisms require validators to hold and stake tokens for the privilege of earning transaction fees.
• Proof-of-stake (POS) is seen as less risky regarding the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous.
• The next block writer on the blockchain is selected at random, with higher odds being assigned to nodes with larger stake positions.

2:12

Click Play to Learn All About Proof-of-Stake

Understanding Proof-of-Stake (PoS)

Proof-of-stake reduces the amount of computational work needed to verify blocks and transactions. Under proof-of-work, it kept blockchain secure. Proof-of-stake changes the way blocks are verified using the machines of coin owners, so there doesn’t need to be as much computational work done. The owners offer their coins as collateral—staking—for the chance to validate blocks and then become validators.

Validators are selected randomly to confirm transactions and validate block information. This system randomizes who gets to collect fees rather than using a competitive rewards-based mechanism like proof-of-work.

To become a validator, a coin owner must “stake” a specific amount of coins. For instance, Ethereum requires 32 ETH to be staked before a user can become a validator. Blocks are validated by more than one validator, and when a specific number of the validators verify that the block is accurate, it is finalized and closed.

To activate your own validator, you’ll need to stake 32 ETH; however, you don’t need to stake that much ETH to participate in validation. You can join validation pools using “liquid staking” which uses an ERC-20 token that represents your ETH.

Different proof-of-stake mechanisms may use various methods to reach a consensus. For example, when Ethereum introduces sharding, a validator will verify the transactions and add them to a shard block, which requires at least 128 validators on a committee. Once shards are validated and a block created, two-thirds of the validators must agree that the transaction is valid, then the block is closed.

How Is Proof-of-Stake Different From Proof-of-Work?

Both consensus mechanisms help blockchains synchronize data, validate information, and process transactions. Each method has proven to be successful at maintaining a blockchain, although each has pros and cons. However, the two algorithms have very differing approaches.

Under PoS, block creators are called validators. A validator checks transactions, verifies activity, votes on outcomes, and maintains records. Under PoW, block creators are called miners. Miners work to solve for the hash, a cryptographic number, to verify transactions. In return for solving the hash, they are rewarded with a coin.

To “buy into” the position of becoming a block creator, you need only own enough coins or tokens to become a validator on a PoS blockchain. For PoW, miners must invest in processing equipment and incur hefty energy charges to power the machines attempting to solve the computations.

The equipment and energy costs under PoW mechanisms are expensive, limiting access to mining and strengthening the security of the blockchain. PoS blockchains reduce the amount of processing power needed to validate block information and transactions. The mechanism also lowers network congestion and removes the rewards-based incentive PoW blockchains have.

Proof of Stake
Proof of Work

Block creators are called validators
Block creators are called miners

Participants must own coins or tokens to become a validator
Participants must buy equipment and energy to become a miner

Energy efficient
Not energy efficient

Security through community control
Robust security due to expensive upfront requirement

Validators receive transactions fees as rewards
Miners receive block rewards

Goals of Proof-of-Stake

Proof-of-stake is designed to reduce network congestion and environmental sustainability concerns surrounding the proof-of-work (PoW) protocol. Proof-of-work is a competitive approach to verifying transactions, which naturally encourages people to look for ways to gain an advantage, especially since monetary value is involved.

Bitcoin miners earn Bitcoin by verifying transactions and blocks. However, they pay their operating expenses like electricity and rent with fiat currency. What’s really happening then is that miners are exchanging energy for cryptocurrency, which causes PoW mining to use as much energy as some small countries.

The PoS mechanism seeks to solve these problems by effectively substituting staking for computational power, whereby an individual’s mining ability is randomized by the network. This means there should be a drastic reduction in energy consumption since miners can no longer rely on massive farms of single-purpose hardware to gain an advantage.

The first cryptocurrency to adopt the PoS method was Peercoin. It was followed by Nxt, Blackcoin, and ShadowCoin soon after.

Proof-of-Stake Security

Long touted as a threat for cryptocurrency fans, the 51% attack is a concern when PoS is used, but there is doubt it will occur. Under PoW, a 51% attack is when an entity controls more than 50% of the miners in a network and uses that majority to alter the blockchain. In PoS, a group or individual would have to own 51% of the staked cryptocurrency.

It’s very expensive to control 51% of staked cryptocurrency. Under Ethereum’s PoS, if a 51% attack occurred, the honest validators in the network could vote to disregard the altered blockchain and burn the offender(s) staked ETH. This incentivizes validators to act in good faith to benefit the cryptocurrency and the network.

Most other security features of PoS are not advertised, as this might create an opportunity to circumvent security measures. However, most PoS systems have extra security features in place that add to the inherent security behind blockchains and PoS mechanisms.

What Is Proof-of-Stake vs. Proof-of-Work?

Proof of Stake (POS) uses randomly selected validators to confirm transactions and create new blocks. Proof of Work (POW) uses a competitive validation method to confirm transactions and add new blocks to the blockchain.

Is Proof-of-Stake a Certificate?

Proof-of-stake is a consensus mechanism where cryptocurrency validators share the task of validating transactions. There are currently no certificates issued.

How Do You Earn Proof-of-Stake?

Proof of Stake (POS) is a built-in consensus mechanism used by a blockchain network. It cannot be earned, but you can help secure a network and earn rewards by using a cryptocurrency client that participates in PoS validating or becoming a validator.

Can Bitcoin Be Converted to Proof-of-Stake?

It’s possible that Bitcoin can change to proof-of-stake. However, it takes years to implement successfully, and the community would need to agree to the change.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.