Proof of stake is a new blockchain design in which the creator of the next block is chosen by a random selection process and rewarded with newly created coins and transaction fees.
Unlike proof-of-work, where miners use computer processing power to validate transactions, proof-of-stake is an alternative that requires less power for transactions to be authorized.
The result would be less harmful to the environment and it would increase the decentralization of cryptocurrencies.
Unlike proof-of-work, it is not necessary to have mining hardware, and also you don’t need to pay high electricity bills.
Proof of Stake (POS) — what exactly is it?
Proof of Stake (POS) works by using your existing stake in the coin to validate transactions. The more coins you can validate the higher your chances of earning rewards as they are directly proportional to your stake. Several cryptocurrencies within the crypto space are currently using a Proof of Stake system: Blackcoin, NXT, Peercoin, etc… With every cryptocurrency being unique in its way; some having more variations than others.
How does it work?
As mentioned above, the proof of stake mechanism selects a node to validate the next block based on certain factors such as randomization, staking age, and the number of coins owned. The cryptocurrencies that use the proof of stake algorithm are often originally launched by pre-mined coins or initiated by the proof of work mechanism before switching over to proof of stake.
In contrast to proof of work where nodes are rewarded by cryptocurrencies, proof of work compensates miners using transaction fees.
Nodes that are involved in the mining process are required to have a specific amount of coins to participate in the process. The amount of coins accumulated by a user usually represents the size of the stake. The higher the stake, the higher their chances of getting selected as the validator of the next block in the network. Each cryptocurrency has its own set of rules and techniques for selecting nodes using the proof of stake algorithm.
Other common methods used to select participants include ‘Coin Age Selection’ and ‘Randomized Block Selection’. These methods are employed to avoid only wealthy miners from been selected and create
The Coin age selection method selects users based on how long pre-mined coins have been staked for. It is calculated by multiplying the number of coins staked with the number of days the coins have been held. Coin age selection is a system that benefits miners with small and medium-scale coins and prevents large-scale nodes from dominating the blockchain.
The randomized block selection method selects nodes based on the combination of the lowest hash and the highest stake. The stake sizes are visible on the blockchain and the next forger can be predicted.
Advantages of Proof of stake
Proof of stake offers a few advantages over the traditional proof of work algorithm. The major advantages of proof of work are low energy consumption and security. It also offers more decentralization to the network with its randomization process which benefits small-scale miners.
Proof of stake is an algorithm introduced to solve the inconsistencies in the traditional proof of work algorithm. It was brought in to specifically address the heavy energy consumption present in proof of work which is inadequate for the environment. Many cryptocurrencies are starting to adopt the proof of stake algorithm, especially newly-created altcoins.