What Is Proof of Stake (PoS) and How Does it Work?

Cryptocurrencies are decentralized and not under the control of financial institutions, so they need to have a way to verify transactions. One method that many cryptos use is Proof of Stake (PoS).

Super Admin

February 05, 2024

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Cryptocurrencies are decentralized and not under the control of financial institutions, so they need to have a way to verify transactions. One method that many cryptos use is Proof of Stake (PoS).

Proof of stake is a type of consent method used to validate cryptocurrency transactions. With this system, cryptocurrency owners can stake their coins which give them the right to check new blocks of transactions and add them to the blockchain.

This method is an option for proof of work, the first consent system developed for cryptocurrencies. Since Proof of Stake is much more energy-intensive, it has become more popular as attention is focused on how crypto mining affects the planet.

Understanding proof of stake is important for those who are investing in cryptocurrency. Here is a direction, how it works and its pros and cons, and examples of cryptocurrencies that use it.

Proof of stake vs. proof of work

Proof of Stake and Proof of Work are the two most common types of consensus processes used in cryptocurrencies. Proof of work was the preferred method for early cryptocurrencies, including Bitcoin, while Proof of Stake emerged with Peercoin in 2012 and became a common choice for altcoins.

The biggest difference between proof of stake and proof of work is their power consumption. Proof of work requires miners to compete to solve difficult mathematical problems. The first miner has to solve the problem to add a block of transactions and earn the reward. This results in mining devices around the world computing the same problem and consuming considerable energy.

This is a much more environmentally friendly way to verify transactions, as proof of stake does not require validation to solve all the complex equations.

Proof-of-stake mining power

Proof-of-stake mining capacity depends on how many coins a validator is staking. Participants who share more coins are more likely to choose to add new blocks.

Each proof-of-stake protocol works differently when choosing a validator. Usually, there is an element of randomization involved, and the selection process may also depend on how long validators have held their coins.

While anyone who stakes crypto can be chosen as a validator, the chances are slim if you've staked a relatively small amount. If you stake 0.001% of your total amount of coins, your chances of being selected as a validator will be around 0.001%.

That's why most participants connect staking pools. The owner of the staking pools sets up validator nodes and a group of people pool their coins together for a better opportunity of winning new blocks. Rewards are distributed among the pool's participants. The pool owner may charge a small fee.

How does proof of stake work?

The proof-of-stake model allows cryptocurrency owners to stake coins and create their own validator nodes. Staking is when you promise your coins to be used for verifying transactions. Your coins will be locked when you stake, but you can unlock them if you want to trade them.

The cryptocurrency's proof-of-stake protocol will choose a validating node to review the block when a block of transactions is ready for processing. The validator checks whether the transaction in the block is correct. If so, they insert the block into the blockchain and get crypto rewards for their role. But, if a validator proposes adding a block with wrong information, they lose some of their staked holdings as a punishment.

As an example, Cardano, a popular cryptocurrency that uses proof of stake, let's see how this works.

Every Cordano owner can stock and set up their own validation node. When Cardano validates a block transaction, the Ouroboros protocol selects a validator. The validator checks the block, adds it, and receives more Cardano for their problem.