All You Need to Know About Proof of Stake in cryptocurrency

Fredrick Awino
03.07.2022
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Cryptocurrency is a budding field which has witnessed emergence of new terminologies aimed at making investments more informed and robust. As in any field, for one to consider self a guru or experienced in cryptocurrency trading and investing, learning the common words used is not a luxury.

WARNING: Investing in crypto, or other markets, can be of a high risk for your savings. Do not invest money you cannot afford to lose, because there is a risk for losing all of your money when investing in crypto, stocks, CFDs or other investments options. For example 77% of retail CFD accounts lose money.

Maybe you are already bothering how cryptocurrency blockchain operates. As is well known to so many, cryptocurrencies are supported by two great technologies; blockchain and cryptography. It is therefore self justice to take a few minutes and master the goings on in the industry, terminologies and possible manoeuvres.

A start on Proof of Stake

In Proof of Stake (PoS) random miners are used in validating transactions. PoS is also a consensus mechanism that helps in developing new blocks as well as processing transactions on a blockchain. This method is believed to be the solution to solving the environmental impact of cryptos.

Cryptos are decentralized currencies. This means that they are not under the control of any central government including financial institutions making it important for them to verify their transactions. Although there are other methods such as Proof of Work, PoS is also used by other cryptos.

The Way Proof of Stake Works

PoS give crypto investors the chance of staking coins as well as creating their validator nodes. Staking refers to the process of pledging coins to be used in the verification of transactions. When you stake your coins, they are locked up. However, in case you need to trade them then you can unstake them.

In case a block of transactions needs to be processed, the PoS protocol chooses a validator node in reviewing the block. It is this validator that confirms the accuracy of the blocks. After they add the block to the blockchain while also getting their rewards. In cases where incorrect information is provided when a validator proposes on adding information, they lose some of their stakes. This acts as a penalty.

The Meaning of Staking in Proof of Stake

Staking refers to the process in which individuals agree in locking a certain amount of crypto in the crypto exchange. The main aim is to get the opportunity of validating new blocks to be added to a blockchain. The stakers or rather the validators put their cryptos in a smart contract and they are held in a blockchain.

The blockchain algorithm works in a way that it selects validators in checking new blocks. However, it is important to remember that it all depends on the amount of crypto staked. If you have staked more then it means that you have a high chance of being chosen. After the data cleared by the validator is added to the blockchain, one gets new-minted crypto in form of a reward.

In short, for one to have an interest, one must complete a task by checking the blockchain transactions. For instance, in case you validate good transactions, then you will earn interest on your assets. Unfortunately, if you include bad transactions, then you get penalties and even lose some of your assets. Moreover, in case you as a validator submit a fraudulent transaction then you may be punished by slashing. It means that part of your assets is sent to the unusable wallet address that no one has access to.

Proof-Of-Stake Vs. Proof-Of-Work

Proof of Stake and Proof of work in cryptocurrency works differently. First, in terms of mining and validation of a block, in PoS the number of coins or stake determine one’s likelihood of validating a new block. On the other hand, for PoW, the amount of computing work puts in place determines a miner’s chances of mining a block.

Secondly, PoS and PoW are different in terms of reward distribution. For instance, in PoS, a validator does not get a block reward. The reason is that they get a network fee. On the other hand, as for PoW, the person who mines a block first is the one who gets a reward.

Thirdly, both PoW and PoS vary in terms of competition. In PoS an algorithm is what determines a winner. Basically, it bases on the size of their stake. Consequently, in PoW miners have to compete in solving a puzzle. In doing so, they utilize a computer processing power.

Moreover, in terms of Forking, PoS is not automatically discouraged with the PoS systems. However, for PoW, its system prevents continuous forking automatically. Also, with regards to security, in PoS, staking assists in locking the crypto assets in a network. This enhances security in exchange for a reward. Nevertheless, in PoW, the greater the hash, the more secure its network is.

In terms of specialized equipment, in PoS, a standard server-grade device is enough. On the other hand, PoW Graphics Processing Unit and Application Specific Integrated Circuits are used in coin mining. To add a malicious block, PoS miners need to hold about 51% of all crypto in the network. However, in PoW, hackers need about 51% of computing power.

The advantages of Poof of Stake

Proof of Work uses a lot of computational power. Because of this, New York recently introduced a bill to prohibit the mining of cryptos using carbon-based power sources. Therefore, the first advantage of PoS is that it is energy efficient. Its algorithms are highly energy efficient as compared to PoW making it a greener option. It means that PoS consumes less electricity as well as computational power.

Decentralization is another good component of PoS. The large mining tools get the chance of controlling about 51% of networks running the PoW system. This issue results in a centralization threat. Therefore, in case a user on the PoS network invests twice as another user then they have twice control.

PoS also gives more people a chance of participating in blockchain systems. They do this as validators. It means that as a trader of crypto using PoS, you do not need to purchase an expensive computing system. In addition, you do not need to consume lots of electricity when staking crypto. When using PoS, you just need coins. In addition, regarding efficiency and reliability, PoS is more cost efficient as well as energy-efficient. As for PoW, they are less energy-efficient and expensive. The good thing about them is that they are more reliable.

PoS provides higher crypto-economic security as compared to PoW. Also, staking makes it easy for a trader to work towards securing the network. Through this, decentralization is promoted. The validator node can just run on a normal laptop. The staking pools further give users the chance of staking even if they do not have 32 ETH.

The Disadvantages of Proof of Stake

As much as proof of stake is power and energy-efficient, it has its cons. One of them is that it is young like it was just recently invented. This means that it has not been tested for long as compared to PoW. Moreover, implementing PoS is complex as compared to PoW. To migrate cryptos from PoW to PoS is a highly deliberate process. One has to go through an arduous planning process. The strategy enhances the integrity of the blockchain.

In PoW, the traders guess some figures. It means that anyone can do it. However, in PoS, the people with a high amount have a high chance of winning. Therefore, it means that validators having a large amount of crypto or blockchain tokens have a higher influence on the system of PoS.

The Cryptos Using Proof of Stake

  • Tezos (XTC)
  • Cardano (ADA)
  • Cosmos (ATOM)
  • Tron (TRX)
  • EOS (EOS)
  • Algorand

Author Fredrick Awino