Proof of stake - definition

Proof of stake is an alternative to the proof-of-work system used to verify cryptocurrency

                                

A proof of stake (PoS) operates like a smart contract. It protects the interests of cryptocurrency holders. And, as with proof of work, it operates using standard consensus protocol conditions, which are mutually agreed rules that effectively regulate the cryptocurrency system.

What is PoS - proof of stake?

A proof of stake is an alternative to proof of work, which was the original consensus blockchain algorithm used to add new blocks and confirm transactions.

Proof of stake is consensus-based, but does not require the huge amounts of computing power as proof of work does.

A proof of stake doesn’t use computer algorithms, but instead it is based on the number of coins a miner has. 

Proof of stake (PoS) explained

Proof of stake (PoS) allows a person to mine or validate block transactions according to how many coins they hold. This means the more coins a miner owns then the more power they have.

In addition, PoW requires huge amounts of energy, which has led to some miners needing to sell their coins to ultimately foot the bill.

This makes PoS more environmentally friendly than PoW. In summary:

• proof of stake (PoS) gives mining power based on the percentage of coins the miner holds

• bitcoin, the largest cryptocurrency, runs on proof of work rather than proof of stake.

Meaning of PoS 

All cryptocurrencies use a blockchain system with consensus protocol conditions – a set of mutually-agreed rules. These rules incentivise and secure the blockchain system.

These conditions mean that users who discover blocks should make that known and not hold on to them. 

It also means they should not be discovering blocks on top of intermediate chains. For example, if there’s a block B but no block C with any referencing of block C then the user cannot build on the block C.

The consensus rules also aim to resolve blockchain forks so that competing branches become one branch over time.

Yves Renno, head of trading at Wirex, says the PoS protocol:

“Entrusts the block production and transaction validation to those who put their cryptocurrencies at stake. In other words, stakeholders align their interest to the interest of the blockchain, and by extension, to the interest of the community.”

Is proof of stake safe?

Proof of work (PoW) requires huge amounts of energy. In fact, some miners have to sell their coins to pay for the utility bills.

Proof of stake (PoS) makes an attack by miners on the cryptocurrency network less likely because they have more of a stake in the system than they would with PoW.

However, this also makes it cheaper to attack a PoS system. 

Ethereum and PoS

Ethereum is moving to a consensus proof of stake (PoS) mechanism from proof of work (PoW). 

This was always the plan as it’s a key part in the community’s strategy to scale Ethereum via the Eth2 upgrades. 

However, getting PoS right is a big technical challenge and not as straightforward as using PoW to reach consensus across the network.