What Is Proof of Stake PoS? The Motley Fool

These approaches have been used to achieve consensus among database nodes, application servers, and other enterprise infrastructure components for decades. New consensus techniques have been developed in recent years to allow cryptoeconomic systems like Ethereum to agree on the state of the network. While PoS coins with market caps in the billions of dollars might not have to worry about the first issue, the second one could become problematic if exchanges wind up hosting too many validator nodes. To answer the question “what is proof of stake,” we must first define what it means for blockchains to achieve consensus.

what is Proof of Stake

It’s a newer approach than proof of work, with less adoption as a consensus mechanism. “This is where a great deal of innovation is happening today, and indeed a challenge that blockchains will have to overcome if they are ever to become widely used on a global scale,” he says. Critics have argued that the proof of stake model is less secure compared to the proof of work model. The community can resort to social recovery of an honest chain if a 51% attack were to overcome the crypto-economic defenses. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

Proof of Stake Benefits

Mining power in proof of stake depends on the amount of coins a validator is staking. Participants who stake more coins are more likely to be chosen to add new blocks. When the network performs optimally and honestly, there is only ever one new block at the head of the chain, ethereum speedier proofofstake and all validators attest to it. However, it is possible for validators to have different views of the head of the chain due to network latency or because a block proposer has equivocated. Therefore, consensus clients require an algorithm to decide which one to favor.

what is Proof of Stake

Investors can stake their crypto to earn rewards, providing a form of passive income. And the fact that proof of stake is environmentally friendly means it will likely continue to grow more popular as a consensus mechanism. PoS consumes less computational power and facilitates increased transactions and processing speeds than PoW, making it a more viable option as a consensus mechanism.

What is proof-of-stake? A computer scientist explains a new way to make cryptocurrencies, NFTs and metaverse transactions

HPoS systems often depend on PoW miners to create new blocks containing new cryptocurrencies. These blocks are subsequently forwarded to PoS validators, who then decide whether or not the new blocks should be added to the blockchain through voting. Standard PoS protocols only consider the amount of cryptocurrency staked when selecting a validator.

Polkadot is a next-generation blockchain protocol designed to support multiple chains within a single network. It has implemented a new innovation to the Proof of stake consensus which is known as Nominated Proof of Stake . Reward for participating / delegating – Users delegate part of their stake to a validator who will be in charge of securing the network. Regarding security, validators are incentivized to act honestly in producing blocks and approving transactions for two primary reasons.

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The transaction can be considered “finalized”, i.e., that it can not be reverted, if it has become part of a chain with a “supermajority link” between two checkpoints. Checkpoints occur at the start of each epoch and to have a supermajority link they must both be attested to by 66% of the total staked ETH on the network. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

Energy Consumption

Consensus is what addresses the “double spending” problem of digital money. If there were any way the user of a cryptocurrency could spend their coins more than once, it would undermine the entire system. Validating transactions to the cryptocurrency’s blockchain ledger can occur in many different distributed approaches known as consensus algorithms, including PoS and proof of work .

what is Proof of Stake

The following provides an end-to-end explanation of how a transaction gets executed in Ethereum proof-of-stake. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.


If a validator proposes a block with a false transaction or false data history, a significant portion of the validator’s staked resources are slashed by the protocol. Further, the validator is banned from the network to punish this bad behavior. Validators are rewarded by the cryptocurrency, typically with new tokens for participating in the PoW effort. If a validator fails to properly validate a transaction, the stake can be at risk from a reactive action known as slashing, whereby several tokens are revoked. Proof of work has a longer proven history of use as a blockchain consensus mechanism. 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.

A common concern for PoS is that it favours validators with more crypto. Some critics see it as a case of the rich getting richer and the poor being left behind. This could threaten blockchain decentralization by amassing the majority of power in the hands of a few individuals. As miners leave the network , the difficulty will decrease, meaning it becomes easier for miners to mine blocks and receive rewards. This decreased difficulty serves as an incentive for more miners to return to the network, ensuring the network remains strong and sufficiently decentralized.

  • PoS accomplishes this by requiring that validators have some quantity of blockchain tokens, requiring potential attackers to acquire a large fraction of the tokens on the blockchain to mount an attack.
  • In proof-of-work, miners prove they have capital at risk by expending energy.
  • However, they pay their operating expenses like electricity and rent with fiat currency.
  • In PoS, a group or individual would have to own 51% of the staked cryptocurrency.
  • A proof-of-stake system functions as a cryptographic proof of ownership and proof of vested interest in the project’s ongoing success.
  • Proof of stake has a security risk when a small number of owners control a large portion of the network’s currency value, but this is unlikely to occur with large, widely held currencies.
  • This has also resulted in a shift of Bitcoin miners to other regions around the world, as it becomes more resilient and profitable.

However, in most blockchain systems, users are anonymous and have no digital ID that can prove their identity. What, then, stops an individual from pretending to be many individuals and casting many votes? There are several different approaches, but the most used is proof-of-work.

Voting in blockchain systems

This results in mining devices around the world computing the same problems and using substantial energy. 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. To prevent attacks, which make it possible to spend funds twice, Bitcoin uses the proof-of-work consensus algorithm. That system asks people to use hardware to help the network process transactions. In proof of work, miners try to solve fiendishly difficult puzzles in order to be the first to complete a block of transactions.

🔌 Because of the lower hardware requirements, proof of stake uses far less energy than proof of work. PoW lowers the risk of forking as it stops malicious users from spending cryptocurrency twice. To hack a PoS system, hackers must hold more than 50% of the coins. Its developers argue that, once successful, proof-of-stake will be more environmentally sustainable, as it dispenses with the dizzying amount of power needed to maintain Bitcoin. In fact, according to the Ethereum Foundation, the shift will reduce the energy consumption of Ethereum by roughly 99.95% after merging. This randomized selection process, as well as stakeholders’ vested interest in the network, is intended to disincentivize participants from attempting to sabotage history and choosing to undermine the system.

Vulnerability to Attack

If a nominator stakes behind a malicious validator, they can also lose their stake. With Proof of Work, you can buy cheap mining equipment or even rent it. With this, you can join a pool and start validating and earning quickly. Sign up and we’ll send you Nerdy articles about the money topics that matter most to you along with other ways to help you get more from your money. Crypto wallet, generally bringing returns beyond what you can get in other savings products. Many or all of the products featured here are from our partners who compensate us.

Proof of stake is a consensus protocol that locks up crypto to secure the network. It’s less energy-intensive than Bitcoin’s proof of work mechanism. PoS offers an alternative to traditional PoW consensus mechanisms and improves it in multiple ways. It sounds great in theory, but its practicality and real-world performance https://xcritical.com/ are yet to be tested. In contrast to DPoS—which has a set validator count—LPoS has a variable amount of active validators. Blockchains that employ liquid proof-of-stake allow users to lend their validator privileges and voting rights to other participants without giving up control of their cryptocurrency.

Any change to the hash by tampering would be noticed and rejected. The Bitcoin network was the first to solve this problem with proof-of-work. Proof-of-stake has emerged as a possible alternative that some researchers think is both more energy efficient and more secure.

In proof-of-work blockchain, majority decision is represented by the “longest-chain-wins” rule. This means that participants in the blockchain network accept the longest chain of blocks as being the only valid one. Reduced centralisation risk – because of the low energy requirement, proof-of-stake should lead to more nodes securing the network. A miner will continually run a dataset, which can only be obtained by downloading and running the entire chain , through mathematical processing when racing to build a block.

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