Proof-of-stake is one of the terms you would come across in the world of cryptocurrency. Since cryptocurrency transactions are not verified by anyone, the consensus mechanism is therefore used to validate transactions.
The first consensus mechanism is the Proof-of-Work consensus mechanism which comes to play while mining Bitcoin. The PoS is the alternative to the PoW.
Several crypto projects today make use of the PoS as against the PoW due to its advantages. Ethereum is one of the top crypto projects moving into the proof-of-stake model.
In this post, we’ll learn about the proof-of-stake mechanism, how it works, and some of the crypto projects making use of it.
What is Proof-of-Stake?
Proof-of-stake (PoS) 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.
As against the proof-of-work mechanism where miners use computational machines to add new blocks of BTC, validators (in this case) stake their coins. This gives the validators the right to check new blocks of transactions and add them to the blockchain.
Proof-of-stake (POS) is seen as less risky in terms of the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous.
How does Proof-of-Stake Work?
In the proof-of-stake model, cryptocurrency owners are allowed to stake coins and create their validator nodes. Those who create this node are referred to as ”validators”.
Staking means giving out your crypto coins for validations to earn rewards. When you stake, your coins are locked up while you stake them, but you can unstake them if you want to trade them.
When a block of transactions is ready to be processed, the cryptocurrency’s proof-of-stake protocol will choose a validator node to review the block. The validator checks if the transactions in the block are accurate.
If found accurate, they add the block to the blockchain and receive crypto rewards for their contribution. However, if a validator proposes adding a block with inaccurate information, they lose some of their staked holdings as a penalty.
For example, an Algorand holder can stake it and set up their validator node. When ALGO needs to verify blocks of transactions, the project’s protocol selects a validator. The validator checks the block, adds it, and receives more ALGO for their part.
Why Most Crypto Projects Use Proof-of-Stake
1. It is Energy Efficient
One of the reasons PoS projects have been considered is that they are energy-efficient. The PoS mechanism seeks to solve energy 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.
2. It Provides Fast & Inexpensive Transaction Processing
Generally, this is one of the advantages of a cryptocurrency over traditional money. Crypto projects that utilize the PoS consensus mechanism are very fast and with little or no fee.
For example, The Solana network can theoretically process over 710,000 transactions per second (TPS) with little or no cost.
3. It Doesn’t Require Special Equipment to Participate
It doesn’t require special equipment to participate in mining as it is with PoW. Participants only buy coins or tokens to become a validator. The validators receive transaction fees as rewards at the end of the process.
Disadvantages of Proof-of Stake
Proof-of-stake is not as proven in terms of security as proof of work.
2. Validators’ Influence
Validators with large holdings can have an excessive influence on transaction verification.
3. Locking of Coins
Some proof-of-stake cryptocurrencies require locking up staked coins for a minimum amount of time.
What are the Differences Between Proof of Stake & Proof of Work Consensus Mechanism
In the PoS model, crypto owners can stake their coins, then the protocol selects a validator who adds a new block of transactions and earn rewards. For PoW, the first miner to solve a puzzle gets to add a block of transactions and earn rewards.
PoS doesn’t require validators to purchase specialized equipment to solve complex equations. PoW requires hardware and energy because mining capacity depends largely on a miner’s computational power.
List of Crypto Projects that Use Proof-of-Stake
Here are some of the top cryptocurrencies utilizing a proof-of-stake mechanism.
2. Cardano (ADA)
3. Solana (SOL)
4. Tezos (XTZ)
5. Polkadot (DOT)
6. Cosmos (ATOM)
7. Algorand (ALGO)
9. Avalanche (AVAX)
10. Tron (TRX)
Several other projects are being released on this blockchain network.
The proof-of-stake mechanism is an alternative to the proof-of-work mechanism that helps to verify transactions on blockchains. The PoS mechanism features some great advantages that make it a suitable alternative to the PoW system.