Proof-of-Stake 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. In the case of cryptocurrency, the database is called a blockchain – so the consensus mechanism secures the blockchain.
With Proof-of-Stake, cryptocurrency owners validate block transactions based on the number of staked coins. – Proof-of-Stake was created as an alternative to Proof-of-work, the original consensus mechanism used to validate a blockchain.
Holding and Staking
While Proof-of-Work mechanisms require miners to solve cryptographic puzzles, Proof-of-Stake mechanisms require validators to hold and stake tokens for the privilege of earning transaction fees on a blockchain.
Proof-of-stake is seen as less risky regarding the potential for an attack on the network, as it structures compensation in a way that makes an attack less advantageous. The next block writer is selected at random, with higher odds assigned to nodes with larger stake(s).
Proof-of-stake reduces the amount of computational work needed to verify blocks and transactions. Under proof-of-work, it kept blockchain secure. Proof-of-stake changes the way blocks are verified using the machines of coin owners, so there doesn’t need to be as much computational work done. The owners offer their coins as collateral—staking—for the chance to validate blocks and then become validators.
Validators are selected randomly to confirm transactions and validate block information. This system randomizes who gets to collect fees rather than using a competitive rewards-based mechanism like proof-of-work.
Understanding Proof-of-Stake continued
To become a validator, a coin owner must “stake” a specific amount of coins. Blocks are validated by more than one validator, and when a specific number of the validators verify that the block is accurate, it is finalized and closed.
Different proof-of-stake mechanisms may use various methods to reach a consensus. Once shards are validated and a block created, two-thirds of the validators must agree that the transaction is valid, then the block is closed.
How is Proof-of-Stake different from Proof-of-Work?
Both consensus mechanisms help blockchains synchronize data, validate information, and process transactions. Each method has proven to be successful at maintaining a blockchain, although each has pros and cons. However, the two algorithms have very differing approaches.
Under PoS, block creators are called validators. A validator checks transactions, verifies activity, votes on outcomes, and maintains records. Under PoW, block creators are called miners. Miners work to solve for the hash, a cryptographic number, to verify transactions. In return for solving the hash, they are rewarded with a coin.
How is Proof-of-Stake different from Proof-of-Work? continued
To “buy into” the position of becoming a block creator, you need only own enough coins or tokens to become a validator on a PoS blockchain. For PoW, miners must invest in processing equipment and incur hefty energy charges to power the machines attempting to solve the computations.
The equipment and energy costs under PoW mechanisms are expensive, limiting access to mining and strengthening the security of the blockchain. PoS blockchains reduce the amount of processing power needed to validate block information and transactions. The mechanism also lowers network congestion and removes the rewards-based incentive PoW blockchains have.
Proof-of-Stake Goal 1
Proof-of-stake is designed to reduce network congestion and environmental sustainability concerns surrounding the proof-of-work (PoW) protocol. Proof-of-work is a competitive approach to verifying transactions, which naturally encourages people to look for ways to gain an advantage, especially since monetary value is involved.
Proof-of-Stake Goal 2
Miners earn cryptocurrency by verifying transactions and blocks. However, they pay their operating expenses like electricity and rent with fiat currency. What’s really happening then is that miners are exchanging energy for cryptocurrency, which causes PoW mining to use as much energy as some small countries.
Proof-of-Stake Goal 3
The PoS mechanism seeks to solve these 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.
SagaChain™ consensus explained
What is the SagaChain hybrid consensus mechanism? …we explain in detail, why it is more secure than a single Proof of Work or Proof of Stake system.