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Proof-of-stake (PoS) is a consensus mechanism for blockchain networks. In PoS, the nodes of the network commit 'stakes' of tokens for a set period of time in exchange for a chance at being selected to produce the next block of transactions. The node that's chosen — referred to as the 'validator' — will receive the block rewards in the form of the native token of the network.
A consensus mechanism is a set of rules or agreement for all of the nodes in a blockchain network to agree on which transactions are valid and which ones are not.
To answer the question 'what is proof of stake,' we must first define what it means for blockchains to achieve consensus. Blockchain is a decentralized distributed ledger of transactions. Because there's no single server controlling the network, there has to be some way for everyone to agree on which transactions are valid. Otherwise, it would be possible for people to create fake transactions.
The servers in a blockchain are called 'nodes.' Nodes process transactions. Some nodes have the ability to add blocks of transactions to the chain, maintaining and growing the ledger. In Proof of Work (PoW) networks like Bitcoin, these nodes are referred to as 'miners.'
For PoS, nodes commit funds to the network — a process known as 'staking' — for a chance to be chosen as the next block writer instead of nodes competing with each other to be rewarded for solving cryptographic puzzles, as is the case with PoW.
In PoS networks, nodes that can add blocks are called 'validators,' which are individuals who are responsible for verifying transactions on a blockchain. Each validator has a chance at being selected to write the next block and receive its rewards.
PoS can improve upon some of the biggest problems presented by PoW, namely:
A growing number of the most popular cryptocurrencies use some variation of the PoS protocol. Here's a partial list:
These networks aim to accomplish a variety of different tasks.
Because there is no 'mining' involved in PoS, PoS networks often start with a 'pre-mine,' where the entire supply of tokens is brought into existence at once.
The short answer is yes. Those who become validators have the opportunity to win the next block reward of new tokens for their network of choice. But not just anyone can become a validator.
The number of tokens needed to become a validator varies according to the network. For some networks, the price could be small, while others could require quite a large sum.
Thankfully, some crypto exchanges have made things easier for retail investors looking to stake their PoS coins.
Rather than having to set up your own validator node, some exchanges have become validators themselves. They then offer to stake tokens on behalf of users who hold PoS tokens in their exchange wallets. There's usually no minimum amount required.
However, some have criticized this approach as being too centralized.
Gould acknowledged this in saying that Nodamatics is 'actually doing research on this issue at the moment,' with regard to the geographic and technical diversification of the infrastructure that runs proof-of-stake networks.
Beaudry also noted that the security of a PoS network is primarily tied to two things:
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.
Both PoS and PoW mechanisms achieve the same end goal, but by different means.
The main difference between networks that use PoS and those that use PoW is how the network achieves consensus for its blockchain.
Gould notes that PoS is easiest to understand 'if it's contrasted to proof-of-work.' He goes on to explain that 'in proof-of-work, the consensus is achieved by allowing a single participant to write the next block in the blockchain and be rewarded in the native cryptocurrency of that blockchain for their efforts.'
Miners are effectively spending large amounts of computing power and electricity as they work on 'solving a very hard cryptographic puzzle.'
This approach has been criticized as requiring too much energy, having difficulty scaling or growing the network, and not providing enough throughput.
Proof of Stake (PoS) is a consensus mechanism used to validate crypto transactions and is meant to improve upon perceived flaws of Bitcoin's Proof of Work (PoW). Some of the largest and fastest-growing coins have implemented this protocol.
Holders of PoS tokens can earn a 'crypto dividend' on their holdings by staking their crypto and becoming network validators. Because this sometimes requires a substantial investment, exchanges have taken it upon themselves to make the process simpler and more affordable for the average user.
Understanding how PoS is key to understanding cryptocurrency and how it works. In general, it's always better to know what you're investing in before getting involved.
