What Is Proof of Stake?

If you've been in the crypto space for some time now, you might have heard that some cryptocurrencies - notably Bitcoin - require a huge amount of electrical energy to secure their network and make it work properly. This is because these cryptos primarily rely on the "proof of work" protocol, which sizable large amounts of computing power to mine. On the other hand, proof of stake (also known as PoS) is a different concept that is not dependent on mining, and thus resolves some of the issues associated with it. Namely, the proof of stake method has validators instead of miners, and they "forge" new blocks instead of "mining" them. These validators are required to deposit a stake which can be considered as a security deposit which ensures that transactions are kept fair.

Summary of Important Points

• Securing new blocks on proof of work cryptocurrencies requires high computing power which leads to excessive energy consumption.
• The proof of stake consensus mechanism doesn’t rely on mining, so it largely minimizes the need for electrical energy.
• In PoS, users are semi-randomly chosen to validate transactions in order to forge their new block and receive their reward.

This approach seems to be gaining popularity among cryptos & influential crypto figures, as proven by the Ethereum move to PoS scheduled in 2022.

• While improving on a few areas, the crypto PoS system is not perfect, so delegated proof of stake might be the future for the blockchain.

What Does Proof of Stake Aim to Do?

The concept of proof of stake as an idea aims to improve on the weaknesses that proof of work struggles with. As we mentioned previously, one of the biggest downsides to proof of work is the enormous amounts of energy being spent by miners. Since the concept favors the miners with better equipment, it's widely sometimes regarded as being purely flawed. Namely, some users are abusing this flaw and building mining pools that give them better chances & better possibilities at digging out the next block than the regular users. This results in unfair competition, abnormal energy consumption, making the blockchain more centralized - and decentralization is one of the main pillars of the blockchain.

Instead of encouraging users to waste electrical energy to stay ahead of the competition, proof of stake proposes a selection process. With a fair dose of randomness, the proof of stake algorithm chooses a node to validate the next block. It is not completely random, as nodes are required to make a deposit with a minimal amount in order to become validators. Unfortunately, there is a flaw here too, as nodes that deposited higher stakes have a better chance at forging the next block. Even though it is not a perfect solution as it still favors the more financially powerful users, it is better than the proof of work idea in multiple regards - especially regarding energy consumption.

Difference Between Proof of Stake and Proof of Work

There are a few significant differences between the proof of stake and proof of work consensus mechanisms. For starters, they use different terminology. With PoW (Proof of Work) currencies like BTC and LTC, the users are called miners and they mine for their new blocks. This is because they are required to use big amounts of computing power to solve a complicated cryptographic puzzle. The miner who is the first to solve the puzzle gets the reward. As a result, miners invest in powerful technology to create big mining farms and compete against each other.

Unlike PoW, the PoS cryptocurrencies like Peercoin, Cardano, and Nano take more of a selective approach to rewarding their users. They allow users to forge new blocks by validating transactions and don’t inspire competition between them. This helps to keep the blockchain decentralized and works against excessive energy consumption. As we noted previously, the positives of the PoS principle were noticed by the Ethereum network, so the crypto should move to this mechanism in 2022.

When debating the proof of stake vs proof of work concepts, we must mention the delegated proof of stake technique. It is an improved and evolved version of the PoS mechanism, allowing users to vote for the next delegate who will validate the next block. It shows promise that it can improve upon some of the flaws that PoS has, and it is seen as its successor by thousands of crypto users online.

Advantages and Disadvantages of Proof of Stake

Advantages

• An eco-friendly concept that minimizes energy usage.
• Pushes towards decentralization.
• More secure against a 51% attack.
• Doesn’t favor the financially fortunate as much as PoW.

Disadvantages

• Slightly more complex than PoW.
• Requires depositing a stake of coins to become a validator.