What is Proof of Stake?
Proof of Stake is a relatively new way of validating a transaction has taken place on a blockchain. It was adopted by cryptocurrencies such as Ethereum and Stratis and helps to reduce the reliance on the demanding computing necessary for miners to use in the Proof of Work method.
If you’re unfamiliar with what was just said, head over to our Beginners Guide to Bitcoin post to get an understanding of the basics of how traditional blockchains work.
How it Works
Proof of Work works on how fast miners are able to verify transactions on the network. Proof of Stake works a bit differently. It’s all about how much of a currency someone owns. If someone owns a certain amount of the currency they are able to lock up that amount and begin running something called a master node.
A masternode is simply a server that is constantly running to help keep the network working smoothly. It’s this that verifies the transactions on the network.
The reward system is also a little different to PoW. The rewards are distributed based on how long you have owned the currency and how much you own. So if you own 1,000,000 ADA coin in your wallet you will have greater authority in the network than someone with 10,000 ADA. That 1,000,000 ADA that is in your wallet will have a length of time it has been in that wallet attached to it. If you move it to a new wallet, the length of time will reset and it will have less of chance to validate a block.
This system means that validators (Proof of Stake version of miners) who have owned their stake in a currency for a long time will be more likely to validate a block and be rewarded. This creates a network of theoretically loyal and trusted validators.
It’s the trust in these substantial stakeholders as to how Proof of Stake actually works. The network trusts that the chain is valid because it has the backing of the validators who are proven to be trustworthy because they have so much of the currency locked up. This is different to how Proof of Work works because it requires “work” to validate the block where as PoS is more about the trust in the validators.
This system leads to several benefits of Proof of Stake and is part of the reason a lot of newer cryptocurrencies are using it.
Proof of Work vs Proof of Stake
We’ve written a similar post called What is Proof of Work? that simply explains the basics.
Proof of Stake was designed to help alleviate some of the problems that Proof of Work has.
Here’s a quick comparison of the two:
Proof of Work
- Simple system that is tried and tested and works very well at its primary purpose.
- It is notoriously energy demanding and is set to get worse as Bitcoin progresses if it stays in its current state.
- Very high, expensive computing power is now required as the calculations that need to be completed are very complex.
- Miners loyalty is likely to be with the coin that gives the best reward.
Proof of Stake
- No need for expensive hardware so it doesn’t have the same demanding energy needs as PoW.
- Potentially more loyal validators. The higher the stake of the validator the higher the chance they have of earning a transaction fee. This means that it is unlikely that someone who has investing a lot into a Proof of Stake cryptocurrency will suddenly switch to another one.
- Generally PoS transactions validate faster.
- With Proof of Stake the more of the currency you own the more say you have with the validation of the transaction. This means that there could be a situation where people with a huge amount of the coins/tokens will have noticeable more power that the everyday user.
Systems based on Proof of Stake can be an efficient, faster and more eco friendly way to complete blockchain transactions. With the use of traditional Proof of Work slowly being used less and less there is room for Proof of Stake to become the norm. Not only is this being used more but other solutions are also being created, such as IOTAs tangle.
We hope this article has helped shed some light on what Proof of Stake actually is and how it is different to Proof of Work. If you’re still stuck for answers connect with us on Facebook, Twitter or in the comments below.