What is Proof of Stake?

By Michael Thorburn

Share:

Proof of Stake (PoS) allows an individual to mine or validate transactions within a blockchain according to how many coins they hold.

The concept of Proof of Stake (PoS) is that an individual can mine or validate transactions within a blockchain according to how many coins they hold. Meaning that the more coins an individual holds the more mining power they have.

Created as an alternative to Proof of Work, the Proof of Stake concept is considered less risky in terms of potential attacks on the network from miners due to the compensation from an attack being less advantageous.

How Proof of Stake works

Proof of Stake requires less computing power and was created to address the concerns around the scalability and environmental sustainability of the Proof of Work protocol. That said, Bitcoin opts to run on Proof of Work rather than Proof of Stake.

According to the University of Cambridge’s Bitcoin Electricity Consumption Index, Bitcoin consumes around 132.5 terawatt-hours per year, which is more than the Netherlands consumes annually. Proof of Stake was created to address the issue of sustainability by substituting staking for computational power.

PoS limits a miners mining power in line with their ownership stake. For example, if a miner owns 5% of the coins available they can only mine 5% of the blocks. While many cryptocurrencies currently run Proof of Work protocols, it is anticipated that they will switch to Proof of Stake in the future.

The highly anticipated Ethereum 2.0 is expected to run Proof of Stake protocols when it is launched in the near future. Currently the second-largest cryptocurrency behind Bitcoin, this move could see Ethereum grow in popularity and therefore value in the coming years.

Other cryptocurrencies that currently use Proof of Stake include Peercoin, Nxt, Blackcoin and ShadowCoin. It is expected that Bitcoin will eventually transition to using the Proof of Stake protocol, although when this move will occur is not clear.

Benefits of Proof of Stake

More sustainable

Compared to the Proof of Work protocol, Proof of Stake uses less energy, making it a more sustainable and environmentally-friendly option for mining blockchains. The energy consumption and computational power required to mine blocks is often a concern when it comes to cryptocurrencies.

Quick and inexpensive transaction processing

Proof of Stake makes transaction processing quicker and less expensive. For example, on Ethereum a block is mined on average every 14 seconds, but during high transaction events, it can take hours for transactions to be processed.

Drawbacks of Proof of Stake

It may not be as secure

As a relatively new concept, there are doubts over the security of Proof of Stake and it’s considered that its levels of security are not as proven as those provided by Proof of Work. There are concerns that attacks on the network could lead to network centralization, which defeats the point of decentralized blockchains.

Staked coins could be locked

Some cryptocurrencies that use the Proof of Stake protocol require staked coins to be locked for a minimum amount of time. Meaning that once a coin is staked, the user would not be able to sell that coin until the defined staking period had passed.

Share:

Author: Michael Thorburn

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.