What is Proof Of Stake? #
Proof Of Stake (PoS) is a Blockchain consensus mechanism that permits users to earn rewards by validating transactions and creating new blocks on Blockchain.
Simply explained, PoS means: To become a Validator of Blockchain, a user must “stake” a specific amount of his/her properties. Currently, PoS has become a popular consensus mechanism for Blockchain networks.
How does PoS work? #
There are no miners in PoS but Validators. To become a Validator, a node must stake a specific amount of tokens on the blockchain platform. The larger the stake, the higher the chance for that node to be selected to create new blocks and validate transactions. There are two common methods used to select a Validator:
- Randomized Block Selection: By looking for the Validators with lowest Hashrate along with highest stakes.
- Coin Age Selection: By selecting nodes based on how long their tokens have been staked. The age of a coin is calculated as: the number of days the coin has been staked multiplies the coin’s quantity. After the nodes create a block, the age of the coin will be reset to zero and nodes have to wait for a certain amount of time to be able to create the next new block. This system prevents nodes with large stakes from dominating the blockchain.
After a node is selected, the Validator will verify whether transactions in the block are valid or not. There will be a verification between nodes. If most of the nodes approve, the block becomes part of the blockchain. After that, the Validator will receive a transaction fee as a reward (usually the rewards are coins).
Advantages and Disadvantages #
Advantages #
- Lower hardware and energy costs: PoS reduces hardware and energy costs because only one computer is required to create a node and stake on the network. “Buffalo” computational power is unnecessary
- Excellent scalability: Mining cryptocurrencies may be done with any simple computer that has internet access and is online all the time. Adding nodes into a blockchain network is less complicated, cheaper, and friendlier to users.
- High security: Coin attacks on the 51% PoS network are more challenging. In particular, if the nodes knowingly confirm illegal transactions, they will lose the majority of their assets.
- Flexibility: To avoid processing delays, the Proof of Stake will use other available reserve nodes if the node chosen to be the validator for the following block is unavailable for a predetermined period of time.
Disadvantages #
- Risk of investment return: Depending on the token supply for a project, its price may rise or fall. The supply has been reduced by staking with Validators, but there is no guarantee that the price of token will rise throughout the staking process. Many blockchains take a while to unstake, so that users find it challenging to keep up with severe market crashes.
- Poor security with low-cap projects: The 51% chance of being hacked with low-cap projects is very large. Fraudsters can take advantage of this to buy more than 50% of the tokens and take control of the network, and also have the opportunity to abuse power.
- Prioritize a large number of stakes: With a larger number of stakes, the Validator will have more chances of being selected to process more transactions, creating problems around prioritization.
Comparition: PoS vs PoW (Proof Of Work) #
| Proof of Stake (PoS) | Proof of Work (PoW) | |
| Affection to the environment | Save the environment | Cause negative impact on the environment |
| Energy consumption | Save energy | Consume a lot of energy |
| Scalability | Excellent scalability | Low scalability |
| Profits come from | Transaction fee | Create blocks |
| To create a block in blockchain | Validators are determined randomly or based on a staked amount. After that, they will process the transaction and create the block | Miners compete with each other to solve complex algorithms by using computational power from the computer system |
| Who is permitted to validate/mine the blocks | The more someone stakes, the more chances of validating new blocks | The higher the computational power, the greater the possibility of validating new blocks |
| Mining equipment required | A computer has internet access 24/24 or mobile | A professional computer system with high configuration |