What Is Proof-of-Stake (PoS)?
Proof of stake is a consensus mechanism used to verify new cryptocurrency transactions. Since blockchains lack any centralized governing authorities, proof of stake is a method to guarantee that data saved on the network is valid.
Decentralization is at the heart of blockchain technology and cryptocurrency. There’s no central gatekeeper to manage a blockchain’s record of transactions and data. Instead, the network relies on an army of participants to validate incoming transactions and add them as new blocks on the chain.
With proof of stake, participants referred to as “validators” lock up set amounts of cryptocurrency or crypto tokens—their stake, as it were—in a smart contract on the blockchain. In exchange, they get a chance to validate new transactions and earn a reward. But if they improperly validate bad or fraudulent data, they may lose some or all of their stake as a penalty.
In proof-of-work, miners prove they have capital at risk by expending energy. Ethereum uses proof-of-stake, where validators explicitly stake capital in the form of ETH into a smart contract on Ethereum. This staked ETH then acts as collateral that can be destroyed if the validator behaves dishonestly or lazily. The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves.
Solana, Terra and Cardano are among the biggest cryptocurrencies that use proof of stake. Ethereum, the second-largest crypto by market capitalization after Bitcoin, is in the midst of a transition from proof of work to proof of stake.
Proof of work has earned a bad reputation for the massive amounts of computational power—and electricity—it consumes. Given heightened concern about the environmental impacts of blockchains that use proof of work, like Bitcoin, proof of stake offers potentially better outcomes for the environment.
Proof of stake opens the door to more people participating in blockchain systems as validators. There’s no need to buy expensive computing systems and consume massive amounts of electricity to stake crypto. All you need are coins.
Crypto exchanges like Coinbase, Binance and Kraken offer staking as a feature on their platforms. There are even dedicated staking platforms, like Everstake. Depending on the blockchain, crypto owners can earn yields of 5% to even 14% on their holdings by staking.
Certain implementations of proof of stake could leave blockchains more vulnerable to different kinds of attacks than proof of work, such as low-cost bribe attacks. Susceptibility to attacks decreases the overall security of the blockchain.
Validators who hold large amounts of a blockchain’s token or cryptocurrency may have an outsized amount of influence on a proof of stake system.
Migrating a cryptocurrency from proof of work to proof of stake is a complicated and highly deliberate process. Any crypto that wants to change consensus mechanisms will have to go through an arduous planning process to ensure the blockchain’s integrity from start to finish and beyond.
