What is Proof of Stake (PoS)? Learn how PoS works

Proof of Stake (PoS) is a consensus algorithm used by some cryptocurrencies to verify transactions and create new blocks on blockchain. PoS was designed as an alternative to the energy-consuming PoW algorithm and has gained increasing attention in recent years.

This AZCoin article will provide an overview of PoS, explain how it works, its advantages and disadvantages and compare it to PoW.

What is Proof of Stake (PoS)?

Proof of Stake (PoS) is a consensus mechanism in blockchain that allows for the validation of transactions and the creation of new blocks without the need for complex mathematical calculations as in Proof of Work (PoW).

 Instead, validators are selected based on the amount of cryptocurrency they stake. Those who hold more tokens have a higher chance of being selected as validators and receiving rewards. PoS reduces energy consumption and costs, while also supporting network scalability.

History of the development of the Proof of Stake mechanism

The Proof of Stake (PoS) mechanism has undergone a remarkable evolution since its first introduction in 2011. Below is a brief history of PoS development:

• 2011: Sunny King introduces the concept of PoS in an article about Peercoin, the first cryptocurrency to adopt PoS to solve the energy consumption problem of PoW.
• 2012: Peercoin implements a variant of PoS, combining both PoW and PoS in its protocol, marking the beginning of PoS adoption in cryptocurrency projects.
• 2014 – 2016: PoS continues to grow with the emergence of projects like Novacoin and interest from the community. Variants of PoS such as Delegated Proof of Stake (DPoS) and Proof of Stake Velocity (PoSV) are introduced to optimize network performance.
• 2020: Ethereum begins the transition from PoW to PoS via Ethereum 2.0, marking a major step forward in PoS adoption for large-scale blockchain systems.
• 2021 – present: PoS is widely adopted in many new blockchain and cryptocurrency projects such as Cardano and Polkadot, demonstrating the potential of PoS in supporting complex blockchain systems and expanding blockchain application capabilities.

How Proof of Stake (PoS) works

The basic working mechanism of PoS involves a few steps:

• Staking: The first user will stake a certain amount of cryptocurrency into the network. This amount will be locked for a certain period of time and the user will not be able to withdraw it during that time.
• Validator selection: After staking, the network will randomly select a validator from the number of people who have staked. The selection rate is usually based on the amount of cryptocurrency each person has staked; that is, people who stake more have a higher chance of being selected as a validator.
• Confirming transactions: The selected validator will confirm transactions and add them to the new block. This process doesn’t require solving difficult math problems, but only checks and authenticates the accuracy of the transactions.
• Rewards: At the end of the validation process, the validator will receive a reward in cryptocurrency corresponding to the work they have done. This reward comes not only from transaction fees but also from the creation of new coins.

Difference Between PoS and PoW

PoS and PoW are two popular consensus mechanisms in blockchain, but they have the following fundamental differences:

Transaction validation mechanism

• PoW: Requires miners to solve complex mathematical problems to validate transactions and create new blocks. This process consumes a lot of computational resources and electricity.
• PoS: Validates transactions and creates new blocks based on the number of tokens that users stake in the network. Validators are selected based on the number of tokens they hold, without having to solve complex math problems.

Energy consumption

• PoW: Consumes a lot of energy because it requires a lot of computing power. This is one of the major criticisms of PoW.
• PoS: Consumes much less energy than PoW because it does not require complex math.

Transaction processing speed

• PoW: Usually has a slower transaction processing speed because solving math problems and validating transactions can take time.
• PoS: Has the ability to process transactions faster because it does not require complex math and the validation process is quick.

Cost of investment

• PoW: Requires large investments in mining hardware and electricity costs, especially in large networks like Bitcoin.
• PoS: Lower investment costs because only tokens are staked, no expensive mining hardware is required.

Security

• PoW: Provides security by requiring expensive computational resources to attack the network, making attacks infeasible without large resources.
• PoS: Provides security based on the consensus of validators and incentivizes them to act honestly to protect the value of their assets. If a validator acts fraudulently, they can lose their staked assets.

Scalability

• PoW: Scalability is limited due to the computational power and energy requirements. Large PoW networks may have difficulty processing large transaction volumes.
• PoS: Has better scalability because it isn’t limited by computational resources. PoS can handle larger volumes of transactions at lower costs.

Rewards

• PoW: Miners receive rewards in cryptocurrency when they solve a problem and add a new block.
• PoS: Validators receive rewards from transaction fees and sometimes a portion of the new block.

Top 5 projects using Proof of Stake algorithm

Below are five potential Proof of Stake (PoS) algorithm projects you might be interested in:

Ethereum 2.0

Ethereum 2.0 is moving from PoW to PoS to improve scalability and energy efficiency. Investors can “stake” ETH to become validators and receive rewards. This is a big step towards large-scale PoS adoption.

Cardano (ADA)

Is a PoS blockchain with the goal of providing a secure and sustainable platform for decentralized applications (dApps). Cardano stands out for its academic research-based approach and phased development.

Polkadot (DOT)

This is a multi-chain blockchain project, allowing different blockchains to connect and interact with each other. Polkadot uses PoS to ensure the security and scalability of the network.

Tezos (XTZ)

Tezos is a self-upgrading blockchain, allowing changes to be made without splitting the network. Tezos uses PoS to provide a secure and efficient platform for smart contracts and dApps.

Solana (SOL)

Is a high-performance blockchain that uses a variation of PoS called Proof of History (PoH) combined with PoS to achieve fast transaction speeds and low costs.

Future of PoS

PoS is expected to continue to develop and be more widely applied in the cryptocurrency industry. With its outstanding advantages in performance, sustainability and cost, PoS has the potential to become the dominant consensus algorithm in the future. More and more cryptocurrency projects are choosing PoS as a method to secure the network and optimize the transaction verification process.

In addition, with the transformation of major projects such as Ethereum, the cryptocurrency community is gradually accepting and applying PoS. Continuous research and improvement will help PoS become more and more complete, creating conditions for strong development in the future.

Conclusion

Hopefully this article has provided you with useful information about PoS. By understanding the working mechanism, advantages and disadvantages of PoS, you will be able to make informed decisions when choosing to invest in cryptocurrency projects using this algorithm.

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