What is Proof of Stake?

Proof of stake is a 2nd Generation Consensus Mechanism most popularly used in Dash, NEO and QTum.

To recap from our previous articles, a Consensus Mechanism is the method/system used to reach an agreement on a single transaction or data point, there are several different ways to reach it .

In Proof of Stake (PoS) Network miners get rewarded for holding a stake in the respective project. In other words, for holding a stake (specific amount of coins) in a project, they have the opportunity to mine the next block.

Proof of Stake vs Proof of Work

Proof of Stake – Hold a specific amount of Crypto (Stake) and you have a chance of getting a reward
Proof of work – Solve complex equations (mining) to earn a Rewards

With PoW, miners get rewarded for solving a series of complex equations which requires a lot of computational power and energy. Whereas PoS, miners or forgers as they are called get rewarded for simply holding a specific amount of that Cryptocurrency. Think of it like holding a certain amount of money in your bank account, and the more you have, the higher chance you have of attaining rewards.

System of Incentives

The staking also adds a very important incentive for those who are staking to make sure everything is done properly and the system remains safe. As if the system is hacked, their entire stake could be at risk and they could lose everything.

Advantages of PoS

One huge pro’ is that it consumes much LESS power compared with Bitcoin’s Proof of work, this is because there is no mining to be done in this system, unlike PoW.

Furthermore PoS is much more scalable than PoW, this is because there isn’t a need for computational work (mining) which reduces the block confirmation latency. In OTHER words, it has much higher transactions per second.

Disadvantages of PoS

It is possible to buy a majority percentage of coins in this system and become a bad actor (verify incorrect transactions) however this would become difficult as the value of the coin would shoot up as this is happening.

One unfair advantage is that this system favors the wealthy, as with PoS you earn more when you are able to stake more (and meet minimum stake requirement). Therefore those that have more money can afford to stake more money and thus earn a higher return.

To conclude

This is a step forward from Proof of work as it removes the huge unsustainable energy consumption factor and it also build on the scalability factor. This means it could actually be used as a payment system and an alternative to fiat currency (Dollars, Yen, Euro). This is why Ethereum is planning to move from PoW to PoS.

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