You have probably heard one of your Crypto-Nerd friends mention Proof-of-stake and may have been wondering what it means. Well, you’ll be able to show off your knowledge the next time you chat after reading this article?
Proof-of-stake is a protocol adopted by many cryptocurrencies, and a good understanding of this concept boosts general knowledge of crypto and how it functions.
Proof-of-stake is a protocol popularly used in cryptocurrency for ascertaining transactions alongside developing fresh blocks to a blockchain. It majorly uses a consensus validation technique to process, confirm and validate transactions that are conducted on a database, ensuring its security. This database is referred to as the blockchain. Simply, PoS validates transactions and ensures the security of the blockchain.
How Does It Work?
It works off of the activities of coin holders, who may also be called ‘validators’ whose job is to validate new blocks on the blockchain. To qualify as a validator, the coin holders are needed to stake a specific amount of their coins or cryptocurrencies to serve as collateral in a process known as Staking. The algorithm appoints haphazardly qualified validators to validate newly proposed blocks, although the greater the stake of a user, the greater the probability of selection. Once the block receives validation and confirmation by a particular number of validators, the block is finished and locked. PoS drastically lowers the high level of computation needed for block validation and blockchain security.
Why Was It Developed?
Proof-of-stake was developed to diminish energy consumption and other environmental concerns relating to the use of the Proof-of-work. PoW employs a relatively competitive process to verify transactions, which leads to heavy energy consumption. Some experts claim PoW consumes roughly the same energy levels that can power a little country.
Fun fact: the first cryptocurrency to embrace the use of the PoS protocol was Peercoin, closely followed by Nxt, after which BlackCoin joined then ShadowCoin. More popular coins like Solana, Cardano, Polkadot, and Cosmos also use this protocol.
How Does PoS Solve The Problems Of PoW?
Proof-of-stake substitutes heavy computation requirements of PoW with staking, which consequently lessens the amount of energy consumed.
Proof-of-stake protocol decreases the risk of network attacks mainly attributed to Proof-of-work. This is attained by structuring the PoS systems in such a way that a network attack results in little or no benefit to the validator, this is known as the 51% attack. A validator is required to possess 51% of the staked cryptocurrency, but if they decide to overturn or distort the blockchain, they stand a possibility of forfeiting all their stake. This vastly discourages attacks.
Proof-of-stake boosts the throughput limitations of PoW by permitting the creation of numerous blocks simultaneously. Throughput refers to the capacity to perform numerous transactions at the same time.
Proof-of-stake also enhances the scalability of the cryptocurrency involved as compared to PoW.